Why $PAXG Price Deviates from Gold
PAX Gold is an asset-backed cryptocurrency where one token represents one fine troy ounce of physical gold. Its primary design goal is to mirror the price of gold (#XAU ) on a 1:1 basis. However, like any traded asset, the market price of PAXG can temporarily deviate from the actual gold spot price, particularly during periods of market stress or liquidity shortage.
The mechanism to correct these deviations is arbitrage, which is ultimately enforced by the token's core feature: redeemability.
Due to Liquidity Shortage PAXG's price is determined by supply and demand on cryptocurrency exchanges (the secondary market). Price deviations occur when there is an imbalance in buying or selling pressure on the exchanges that market makers and liquidity providers cannot immediately absorb.
How the Peg is Restored
The existence of a Mint/Redeem mechanism directly with #Paxos , provides the crucial economic incentive for arbitrageurs to correct the price. Arbitrage ensures that whenever the PAXG price deviates significantly from the gold price, a risk-free profit opportunity appears, quickly driving the market price back in line with the underlying asset.
There are two primary arbitrage loops:
1. PAXG Trading at a Discount
This occurs when the PAXG price on an exchange drops below the market price of gold plus all redemption fees. Arbitrageur buys PAXG cheaply on the exchange. Then sends the acquired PAXG tokens to Paxos to redeem for the equivalent value in physical gold or fiat currency at the Gold Spot Price.
2. PAXG Trading at a Premium
This occurs when the PAXG price on an exchange rises above the market price of gold plus all minting fees. The arbitrageur deposits fiat currency or physical gold with Paxos to mint new PAXG tokens at the #GOLD Spot Price, then immediately sells the newly minted PAXG tokens on the exchange.
This continuous, self-correcting arbitrage mechanism is the foundation for PAXG's stability and is what keeps its market price tightly bound to the price of physical gold.
