Do we want to have a PYUSD-like stablecoin on Cardano?

Published 8.8.2023

PayPal plans to launch its own PYUSD stablecoin on Ethereum. The question arises why there are no USD-backed stablecoins in the Cardano ecosystem and under what conditions is this acceptable to the community. Stablecoins issued by regulated institutions come with properties that contradict the principles of decentralization. Come explore the differences in the architecture of Cardano and Ethereum to understand the difference between tokens issued via smart contracts and native tokens on Cardano.

Money layer of the internet

I am convinced that blockchain will disrupt the Internet and Web3 visions will become reality within a decade or two decades. Perhaps somewhat paradoxically, the driver of change will not be cryptocurrencies, but stablecoins. The use of stablecoins can increase the adoption of cryptocurrencies as it makes more sense for people to hold the native assets of the network they use daily for financial operations.

Believe me, if PayPal is issuing a stablecoin on Ethereum, they must be holding a big bag of ETH. The incentives are economic and logical. Adoption increases the network effect and this increases the amount of fees collected along with the desire to hold the asset associated with success.

USD has a huge network effect similar to other fiat currencies. Through tokenized dollars, people will adopt blockchain wallets that will become gateways to the Web3 world. In the beginning, people will only have tokenized dollars in their blockchain wallets, but over time, other things like digital identity, NFTs, and other tokenized financial assets will become popular. Some users may remain loyal to custodial solutions, but I believe that more and more people will start switching to self-custody solutions.

DeFi on stablecoins and greater integration with traditional financial services can attract millions of new users to the blockchain world. Dominant blockchain networks will become the monetary layer of the internet. Many people will take full advantage of Web3 and the number of users will grow. It is logical and natural. If self-custody makes sense to you in the case of holding ADA, ETH, BTC, etc, and you understand the advantages that this form offers, you will have the same requirements for money and other financial assets.

The adoption of cryptocurrencies started with their possession. It continued through the ability to exchange digital value in a peer-to-peer manner. The next step is peer-to-peer financial and social services, which we know under the acronyms DeFi and Web3.

Stablecoins are an absolute necessity for cryptocurrency adoption, as the high volatility of cryptocurrencies hinders their use. The vast majority of people hold cryptocurrencies on centralized exchanges and other custodial services because they are not interested in using them for payment and DeFi. A store of value narrative has prevailed among cryptocurrency fans, which has naturally led to a reluctance to use it as a medium of exchange. The reality is that fiat currencies are still a better medium of exchange than cryptocurrencies.

Every ecosystem that wants to be successful in the coming years must have stablecoins, ideally USD-backed stablecoins at this stage of adoption. PayPal on the X platform (formerly Twitter) stated that PYUSD will be backed by highly liquid and secure assets. My understanding is that PYSUSD may not be 1:1 backed by USD, but that probably doesn't matter at this point.

It is important to know that stablecoins issued by regulated institutions come with their terms of use, and these are incompatible with the principles of decentralization. You probably already know what I'm going to tell you now. PayPal may freeze the account and censor transactions of stablecoin users.

Terms and Conditions

If you look at the source code of the smart contract for the stablecoin PYUSD you will find things you will not like. For example, PayPal may freeze your account or wipe the balance of the frozen address.

If you look at the terms of use that are publicly available, you'll be surprised what PayPal can do. In the document, you can learn, for example, that PayPal can seize your crypto assets if they think you have committed illegal activity.

If we believe that you've engaged in any Restricted Activities, we may take a number of actions to protect PayPal, its customers and others at any time in our sole discretion. In addition to the remedies identified in your PayPal Balance Terms and Conditions, the actions we may take include, but are not limited to, limiting your access to or use of the Cryptocurrencies Hub, and/or suspending your Cryptocurrencies Hub, immediately and without penalty to us, including limiting your ability to buy, sell, convert, or transfer Crypto Assets. You authorize PayPal to seize your Crypto Assets if we believe a transaction relating to those Crypto Assets involves money laundering, terrorist financing, fraud or any other type of crime.

In this context, it is necessary to ask whether the release of PYUSD is a positive or rather a negative event for the blockchain industry. This is certainly good news for adoption, but violating the principles of decentralization will probably not please anyone who believed that the blockchain could disrupt the financial system and return power back to the hands of users. PayPal's stablecoin leaves a large share of power in the hands of the company.

PayPal chose the Ethereum platform because it was possible to achieve the functionality required by regulators. All major USD-backed stablecoins including USDT and USDC have been minted on Ethereum and several other platforms. It is necessary to add that these stablecoins have similar properties to PYUSD, i.e. they meet the regulatory requirements.

There is a pressing question facing the Cardano community. Do we want to have these stablecoins on the Cardano platform even at the cost of the possibility of censorship and the possibility of freezing the accounts? And is implementation even possible?

Smart contracts vs. native assets

One of the main reasons why there are no USD-backed stablecoins on Cardano is the difference in design compared to Ethereum. Ethereum allows tokens to be minted through smart contracts. The same smart contract must then be used for any manipulation of tokens, including their transfer to another address. Third-party developers can implement any functionality into the smart contract, including the ability to freeze the user's account, blacklist addresses, etc.

In the image below you can see how the smart contract is used in the interaction between Alice and Bob. Alice wants to send PYUSD tokens to Bob. This request is processed by the Solidity smart contract source code. Third-party developers have control over how the smart contract will process user operations. They basically decide if the tokens get from Alice's address to Bob's address.

Cardano uses a so-called multi-asset ledger. Cardano allows the minting (and burning) of tokens through native scripts. The native script allows you to define only basic token rules through very simple operations. Once the tokens are minted, the Cardano protocol can transfer them just like ADA, i.e. without the use of scripts or smart contracts. In other words, the same source code at the Cardano protocol level that is used for ADA transfer is also used for token transfer.

Third parties do not have control over the Cardano protocol and cannot modify functionality in the same way that Ethereum allows through smart contracts. The Cardano protocol does not allow account freezing or transaction censoring in the case of ADA, so this also applies to all tokens. In other words, it is currently not possible to implement functionality for stablecoins that would meet the requirements of regulators.

In the image below you can see a similar example where Alice wants to send tokens to Bob. Note that the native script was only used for token minting. The transfer of tokens takes place through the source code of the Cardano protocol. Censorship, blacklisting, and account freezing are not possible.

Cardano does not allow those who mint tokens to retain control of them. Tokens minted on Ethereum are more programmable. Both approaches have their advantages and disadvantages. Transferring tokens to Cardano is cheaper, more secure, and due to less direct programmability, it doesn't allow for things like transaction censorship and account freezes. Importantly, the tokens are always owned by the users and no one can take them or prevent them from being sent to someone else.

People using Ethereum have to pay more fees when using the tokens, as it is necessary to pay GAS to use the smart contract. There may be bugs in the smart contract. Thanks to higher programmability, however, it is possible to meet the requirements of the regulators. It is important to note that users do not own the tokens they have on their addresses. Tokens are actually owned, at least to some extent, by whoever has control over the smart contract.

From the point of view of users, it almost doesn't matter whether they use custodial services for ERC-20 or keep tokens in their wallets, as this is not self-custody in the true sense of the word. When sending PYUSD, there will always be a smart contract between Alice and Bob that is controlled by PayPal.

Of course, it is possible to create a smart contract that honors the principles of decentralization. Unfortunately, users may not be able to verify the behavior of the tokens they use.

Which way to go?

The Cardano community is debating the introduction of so-called smart tokens or meta-assets, i.e. tokens that would resemble the ERC-20 standard. These tokens would allow programmability over their transfer from account to account. On GitHub, you can take a look at the proposal that HarmonicLabs came up with. The question that the community should have an answer to is whether we even want such a thing. Complying with regulatory requirements is a topic that will divide the community as opinions may differ.

We absolutely need USD-backed stablecoins. However, businesses cannot use Cardano to mint stablecoins unless regulatory requirements are met. Should the Cardano community insist on the principles of decentralization even at the cost of slower adoption of the project, or provide functionality that will allow implementation of the functionality that institutions require?


Emurgo has not yet been able to launch the planned USDA due to regulatory hurdles. Meanwhile, the Mehen USD (USDM) project has appeared in Catalyst, which is another attempt to deliver a USD-backed stablecoin. One of the other ways to get USD-backed stablecoins on Cardano is through a bridge. Bridges are still a risk, and the Cardano community will certainly remember the Nomad bridge hack that allowed USDC and USDT to be used in the Cardano ecosystem for a short time.

Cardano has an overcollateralized algorithmic stablecoin, DJED, which is more decentralized than USD-backed stablecoins. Unfortunately, algorithmic stablecoins do not currently have the trust of users due to the collapse of the UST (Terra Luna) project.

It would be best to have USD-backed stablecoins as native assets in the Cardano ecosystem, i.e. with all the benefits of decentralization. I'm not at all sure if this is possible to achieve and so far it looks like it's not. So we should think about whether to implement a functionality that will allow the creation of tokens whose transfer can be conditional (i.e. controlled by third-party source code).


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