Tokenized gold has moved deeper into crypto lending after Aave’s XAUT-backed debt reached a $25 million ceiling and Arch Lending added loans against the two largest gold tokens.
Summary
- Aave’s $25 million XAUT debt ceiling was fully used before additional capacity filled within 24 hours.
- Arch’s Himanshu Sahay said investors increasingly want to use tokenized gold instead of passively holding it.
- Arch now accepts PAXG and XAUT as collateral for loans at up to 75% LTV.
- Borrowers retain their gold exposure but face interest, liquidation, custody, and issuer risks.
Arch co-founder and chief technology officer Himanshu Sahay told crypto.news that demand for tokenized gold loans shows holders are beginning to treat the assets as usable parts of the digital financial system, rather than only as a way to track bullion prices.
“The most interesting thing about the demand we’re seeing around tokenized gold is that people aren’t just treating these assets as a way to get exposure to the price of gold. They’re increasingly looking at them as something that can be put to work within the broader crypto financial system.”
Demand recorded on Aave provides one example. In late January, the decentralized lending protocol’s XAUT market reached its $25 million debt ceiling, according to a Chaos Labs assessment.
Chaos Labs recommended raising the ceiling to $30 million after finding demand to use XAUT as collateral for stablecoin borrowing. Within days, the risk manager reported that the added capacity had filled in less than 24 hours and proposed staged increases to $36 million, $43 million, and eventually $50 million.
Aave demand has tested tokenized gold lending capacity
Although the Aave activity showed that investors were willing to borrow against tokenized bullion, Chaos Labs found that the market was highly concentrated. Its February assessment said the largest position accounted for more than 75% of all debt secured by XAUT.
The same report described the users’ health factors as moderately safe and cited XAUT’s liquidity and relatively conservative volatility when assessing liquidation risk. Aave listed XAUT in isolation mode, preventing holders from using the asset to borrow more volatile tokens.
Initial parameters allowed users to borrow up to 70% of their XAUT collateral’s value, while liquidation could begin at 75%. The arrangement treated XAUT as collateral only, meaning users could supply it to support debt but could not borrow the gold token itself.
Sahay described the January activity as more meaningful than a one-time jump because the extra capacity was also used quickly. According to him, the demand indicates that “the collateral itself is becoming useful.”
Current balances require a separate reading from the January episode. Aave’s Ethereum v3 reserve page recently showed about $70 million of XAUT supplied but no XAUT-backed debt, according to figures provided by Sahay. He said the earlier borrowing should therefore be treated as historical evidence of willingness to use the asset, rather than a description of Aave’s present debt balance.
Recent activity has also extended beyond lending. An August CoinShares report found that real-world asset deposits had tripled to $7.4 billion even as DeFi activity declined, with XAUT and PAXG producing much of the measured spot activity. As reported earlier this month, traders used the two tokens to change their gold exposure as bullion prices moved.
Tokenized gold lets holders borrow without selling
For investors who still want exposure to gold, Sahay said borrowing and selling meet different financial needs. A sale closes the position, while a collateralized loan supplies cash or stablecoins without requiring the investor to give up the asset immediately.
“If an investor sells their gold exposure, they have exited the position,” Sahay said. “Borrowing allows them to access liquidity while retaining exposure to the underlying asset.”
Tokenization reduces some practical barriers because the collateral already exists on a blockchain. Holders do not have to transport physical bullion into a lending arrangement or arrange separate storage before seeking a loan.
PAXG and XAUT each represent a claim linked to physical gold, although their legal and operational structures differ. Paxos says one PAXG represents one fine troy ounce of London Good Delivery gold held in professional vaults. Tether says one XAUT represents one fine troy ounce of gold held in Switzerland.
On Aug. 28, Tether’s website placed XAUT’s market capitalization at approximately $3.27 billion, while CoinGecko valued PAXG at about $1.93 billion. The figures give the two products a combined market value of approximately $5.2 billion.
Tokenized gold previously reached another milestone in March when Tether deployed XAUT on BNB Chain. The BNB Chain expansion gave the token another settlement network alongside its existing infrastructure, while each unit remained tied to an ounce of physical bullion.
Sahay cautioned that digital access does not remove the dangers created by debt. In his view, a lending service still needs suitable LTV limits, custody arrangements, and risk controls because collateral can be liquidated when its value no longer supports the outstanding loan.
“The fact that an asset can be used as collateral doesn’t mean it should be leveraged aggressively,” he said.
Gold and Bitcoin serve different collateral needs
Rather than presenting tokenized gold as a replacement for Bitcoin, Sahay said the assets offer different characteristics to borrowers and lenders.
Bitcoin has more established liquidity across crypto markets and plays a central role as a native digital asset. Gold, however, has a much longer record as a store of value and has historically experienced less price volatility than Bitcoin, according to Sahay.
Gold-backed tokens may therefore appeal to investors who want on-chain borrowing without taking the same level of directional exposure associated with Bitcoin. The blockchain token still introduces risks tied to its issuer, custodian, smart contract, and redemption terms, even when the underlying bullion moves less sharply than BTC.
“I don’t think tokenized gold replaces Bitcoin as collateral. I think it expands the range of assets that can support crypto-native liquidity.”
His comments follow a previous interview in which he identified qualified custody, zero rehypothecation and clear collateral rules as safeguards for digital-asset loans. The custody discussion also covered margin calls and liquidations, which can force a sale when borrowers fail to add collateral or reduce their debt.
Arch has added PAXG and XAUT-backed loans
Within that developing market, Arch Lending has started accepting PAXG and XAUT as collateral at up to 75% LTV, according to information supplied by the company. Anchorage Digital will hold the pledged tokens.
Arch says it does not rehypothecate borrower collateral, meaning the assets are not lent to another party to produce revenue. Its website states that Anchorage holds collateral in segregated wallets and that Arch uses partial liquidations intended to sell only the amount required to restore a loan’s health.
The company’s public website has not yet added PAXG and XAUT to its displayed list of supported assets, which still names BTC, ETH and SOL and shows an LTV of up to 60% for existing loans. The 75% limit and support for both gold tokens therefore come from the company’s new product information.
Competitors already offer parts of the same service. Nexo says eligible customers can borrow against PAXG or XAUT, subject to location and account requirements, while YouHodler and CoinRabbit advertise PAXG-backed products. Ledn announced XAUT-backed lending in June but said the service would become available later in 2026.
US borrowers face tax, access and liquidation questions
For US investors, borrowing against an appreciated digital asset generally differs from selling it because the Internal Revenue Service treats a sale or other disposal as an event that requires the owner to calculate a capital gain or loss. A loan does not involve the same immediate disposal, although a lender’s sale of collateral may create tax consequences.
Individual circumstances, loan structures and liquidation events can affect reporting, and the IRS advises digital-asset owners to keep transaction records and consult a qualified tax professional when necessary.
Arch operates legally as ChainFi Inc. and provides loans to US borrowers under NMLS number 2637200. Its disclosures state that product availability and interest rates vary by jurisdiction, loan type, and principal amount.
According to the company’s current state restrictions, loans are unavailable to individual residents of California, Delaware, Hawaii, Maryland, Mississippi, Montana, Nevada, North Dakota, Rhode Island, South Carolina, and Vermont. Arch also requires borrowers to complete identity checks before transferring collateral and receiving USD or USDC.
Disclosure: This article does not represent investment advice. The content and materials featured on this page are for educational purposes only.