A gold-backed cryptocurrency is a token whose value is pegged to the value of gold. In simple terms, these tokens are backed by actual physical gold and derive their value from gold. Whenever there is a digital gold token generated on the blockchain system, there must exist an equivalent gold deposit stored in a trusted and secured geographical location. Currently, we have digital gold currencies representative of actual gold bars. These gold currencies are ERC-20 tokens residing on the Ethereum blockchain.
Whenever there is a market downturn, Gold is often viewed as a hedge against market panic. This is partly because the value of gold can never reach an inflated value because its price is not tied to any economic activity, unlike other investment assets. Gold-backed assets are also believed to have the same nature. The major advantage of gold-backed crypto assets is that unlike gold, they can be divided into smaller units and their transfer is relatively easy. One such example of a gold-backed cryptocurrency is Paxos Gold (PAXG) launched in 2019 by Paxos Standard. It is also an ERC-20 token operating on the Ethereum blockchain.