How and why did PayPal's PYUSD stablecoin come into existence?
In August 2023, payment giant PayPal launched its stablecoin called PYUSD. This move brought the mass adoption of cryptocurrencies closer and added optimism amid the prolonged bearish trend in the crypto market.
What is PYUSD, and how did it appear?
PayPal USD is a new centralized and collateralized asset-backed stablecoin whose exchange rate is pegged to the US national currency. Paxos is responsible for issuing PYUSD, which has also acted as an issuer of other stablecoins such as Pax Dollar (USDP) and Binance USD (BUSD). According to official data, the company's reserves consist of dollar deposits, short-term US Treasury bonds and similar financial instruments.
The company first announced plans to issue its stablecoin back in 2021. PayPal has been working for two years to create its token, being among the first commercial Web2 companies to launch a stablecoin. The company is known for its loyalty to digital assets, and back in March 2020, it allowed customers to make payments in cryptocurrencies such as:
As well as convert them to fiat currency at an internal exchange rate.
PYUSD is created as an ERC-20 token based on the decentralized Ethereum platform. Ethereum is currently the only blockchain on which PayPal USDE tokens are available. Since the launch of PYUSD, users have been able to access transactions with the stablecoin, such as:
- transfers via the PayPal payment service,
- payments to individuals,
- payment for goods and services,
- conversion into digital assets and fiat.
According to the company, stablecoin was developed for making payments and integrating with the most common trading platforms, wallets and applications.
Statistics and metrics
Despite the high-profile "invasion" into the cryptocurrency sphere, interest in the PYUSD stablecoin did not meet the company's expectations. Analyst firm Nansen noted that users are already accustomed to similar digital assets, allowing cheaper and faster transactions. Just under a month after the launch, users had purchased just 10 per cent of the tokens issued at the time, and the number of wallets with a balance of more than PYUSD 1,000 was less than 10. Despite this, stablecoin has been flooded by major crypto exchanges such as Coinbase and Kraken.
According to CoinMarketCap, the total number of PayPal USD holdings has been just 4,500, with only about 20 holding more than 100,000 PYUSD since its launch. As of December 2023, PYUSD has a capitalisation of just $158.9 million — hundreds of times smaller than USDT or USDC. PayPal is behind even the failed TerraUSD (USTC) stablecoin, which has a capitalisation of $360 million.
Controversial moments
The launch of its stablecoin by such a payment giant has undoubtedly become a very high-profile crypto-industry event on its way to mass adoption, comparable in significance to the likely launch of the Bitcoin ETF. Furthermore, the move only intensifies the competitive race between stablecoins, which is always good for users.
However, at the same time, PayPal USD brings centralisation. Unlike the smart contract of the Ethereum network, which is operated by a decentralized network of validators, the smart contracts of PYUSD and other stablecoins, such as USDT and USDC, are fully controlled by the issuer. In the case of PayPal USD, the Paxos issuer can unilaterally freeze the PYUSD wallet balance and even burn tokens. Centralisation is helpful in case of unauthorized withdrawal of funds, for example, because of an attack by hackers or scammers, but it contradicts the ideology of cryptocurrencies.
Also, for example, regarding the use of PayPal USD, there are points like the system's right to cancel and roll back any transaction and the need to link the account to the PayPal account.
In summary, we can conclude that PYUSD is a CBDC rather than a cryptocurrency, with one exception: it is issued by a commercial organization rather than a government body.
PayPal USD outlook
PayPal is one of the largest and most popular payment systems worldwide, with over 430 million active users. In this regard, PayPal USD may become one of the leading stablecoins in the future, along with USDT and USDC, as it already has developed infrastructure with a vast user base. According to some experts, PayPal USD will help increase the speed and efficiency of cross-border payments.
At the same time, Ethereum is currently not the best choice in terms of transaction speed and cost; with its bandwidth, transaction times average about 3 minutes and fees range from $1 to $2. Perhaps shortly, PayPal USD will be available on other networks, such as:
Another positive sign for the stablecoin is that the New York State Financial Services Authority has included PYUSD in the green list of digital assets in its token listing guidelines published on 15 November 2023. It consists of another stablecoin, USDP, which Paxos also issues. The token listing guidelines do not even include USDT and USDC, which have been repeatedly noted in lawsuits with the SEC regulator.
PayPal USD can play a significant role in popularizing Ethereum and cryptocurrencies in general and significantly empower users of the payment system by giving them access to the entire DeFi ecosystem. For example, financial conglomerate JP Morgan experts believe that PYUSD will increase user activity in the Ethereum network.
