The recent announcement by PayPal to launch its own USD stablecoin, PayPal USD (PYUSD), has brought significant attention to the world of centralized stablecoins. Issued by Paxos and deployed on the Ethereum mainnet, PYUSD joins a growing list of fiat-collateralized stablecoins that maintain reserves in traditional bank accounts to back their digital counterparts.
This article delves into the smart contract code of major centralized stablecoins, highlighting key features, differences, and innovations. By examining code logic, we can better understand how these digital assets function on-chain and how they comply with regulatory requirements.
Understanding Centralized Stablecoins
Centralized stablecoins are digital currencies pegged to a stable asset, like the US dollar, and are backed by reserves held in traditional banking systems. Their smart contracts include specific functions to manage transfers, fees, and compliance features such as blacklisting.
USDT: Tether
Potential Fee Mechanism
USDT’s contract includes two variables: basisPointsRate and maximumFee. These are designed to allow Tether to charge users a fee for transactions, with a maximum cap of 50 USDT. Currently, these values are set to zero, meaning no additional fees are applied during transfers.
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Blacklist Functionality
Tether incorporates a blacklist feature to restrict addresses involved in illicit activities. Blacklisted addresses cannot execute transfer() or transferFrom() functions. Moreover, Tether can invoke destroyBlackFunds() to reduce a blacklisted user’s USDT balance to zero, enhancing regulatory compliance.
USDC: USD Coin
USDC does not implement a fee mechanism. Similar to USDT, it employs a blacklist system that prevents flagged addresses from interacting with the contract. However, unlike USDT, USDC does not include a function to destroy or wipe funds from blacklisted addresses.
All external functions in USDC’s contract require that the interacting address is not blacklisted.
USDP, BUSD, and PYUSD: Paxos-Issued Stablecoins
Blacklist and Fund Wiping
USDP, BUSD, and PYUSD share nearly identical codebases. They include a blacklist (referred to as “frozen” addresses) that restricts transfers. Additionally, these contracts feature a wipeFrozenAddress() function, which resets the stablecoin balance of frozen addresses to zero—similar to USDT’s destroyBlackFunds().
Whitelist and Asset Protection
These stablecoins also introduce an assetProtectionRole mechanism, acting as a whitelist. Addresses with this role can add others to the frozen list or execute the wipeFrozenAddress() function.
Gasless Transactions
A notable innovation in Paxos-issued stablecoins is the support for gasless transactions. Functions like betaDelegatedTransfer() and betaDelegatedTransferBatch() allow approved parties to conduct transfers on behalf of users without the latter needing to pay gas fees, improving user experience and accessibility.
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Key Takeaways and Industry Impact
Centralized stablecoins universally implement blacklisting features to meet anti-money laundering (AML) and regulatory standards. Paxos-issued stablecoins like USDP, BUSD, and PYUSD introduce additional functionalities such as whitelisting and gasless transactions, offering enhanced flexibility.
PayPal’s entry into the stablecoin market with PYUSD signifies a major step toward bridging traditional finance with blockchain technology. By leveraging existing infrastructure and compliance mechanisms, PYUSD has the potential to onboard millions of users into the cryptocurrency ecosystem through a trusted payment platform.
Frequently Asked Questions
What is a centralized stablecoin?
A centralized stablecoin is a type of cryptocurrency pegged to a stable asset like the US dollar. It is backed by reserves held in traditional banks and managed by a central entity, which also enforces regulatory controls.
How does blacklisting work in stablecoins?
Blacklisting prevents specific addresses from conducting transactions. In some cases, issuers can also wipe or destroy funds held in blacklisted addresses to comply with legal requirements.
Are there transaction fees for using stablecoins like USDT?
While USDT’s code includes a fee mechanism, it is currently disabled. Users are not charged additional fees by Tether for standard transactions.
What are gasless transactions?
Gasless transactions allow users to transfer tokens without paying network gas fees. Approved delegates can conduct transactions on behalf of users, making the process more affordable.
How does PYUSD compare to other stablecoins?
PYUSD’s contract is nearly identical to other Paxos-issued stablecoins like USDP and BUSD. It includes blacklisting, whitelisting, and gasless transaction features, distinguishing it from USDT and USDC.
Why is PayPal’s stablecoin significant?
PayPal’s launch of PYUSD integrates cryptocurrency with a widely used payment platform, potentially enabling mainstream adoption by offering users easy access to digital dollars on blockchain networks.