Gold has traditionally been a passive asset — a store of value held in vaults, not a productive instrument generating cash flow. But once gold moves onchain in the form of tokenized assets like Tether Gold (XAUT) and PAX Gold (PAXG), it becomes something entirely different: programmable collateral.
In decentralized finance, gold-backed tokens are no longer limited to price appreciation. They can be deployed into liquidity pools, used as collateral for borrowing, and integrated into yield strategies that turn a traditionally static asset into an income-producing position. The key is understanding how to structure exposure carefully — focusing on correlated pairs, managing borrowing risk, and stacking multiple incentive layers without overextending leverage.
Below, we break down two of the most effective approaches for generating yield on tokenized gold while maintaining disciplined risk management.
Liquidity Providing: Correlated Gold Pairs Only
One of the most efficient ways to generate yield on gold stablecoins is by serving as a liquidity provider for active traders. Investors and traders regularly rotate between tokens to capitalize on short term market opportunities, creating consistent demand for onchain liquidity.
Consider the two largest gold backed tokens Tether Gold (XAUT) and Pax Gold (PAXG). By supplying liquidity to an XAUT/PAXG trading pair on a decentralized exchange, investors earn a share of trading fees each time users swap between the two gold backed assets.
For passive liquidity providers, returns typically average between 1% and 3% annualized. More experienced market makers, however, can deploy tighter liquidity ranges and actively manage positions, with yields that can exceed 10% APR under favorable market conditions.
Maximizing Gold Returns With Yield Farming
Currently, borrowing against gold backed tokens is largely limited to stablecoins. As a result, strategies to maximize returns on tokenized gold generally fall into two primary categories.
The first approach focuses exclusively on stablecoin yield. Investors deploy borrowed stablecoins into DeFi strategies and use the resulting income to steadily increase their exposure to gold backed tokens.
The second strategy involves identifying decentralized exchanges that offer liquidity incentives for gold/USD trading pairs. Platforms such as Merkl.xyz aggregate incentive programs across DeFi, allowing investors to pinpoint exchanges rewarding liquidity providers in governance token emissions.
By concentrating on gold/USD liquidity pools, investors can pursue multiple income streams simultaneously: accumulating additional gold backed tokens, earning stablecoins to repay debt, and collecting protocol emission tokens. These emissions can then be used to further reduce borrowing costs or be reinvested to compound gold exposure.