Paxos

  • Cryptoasset Report
  • June 14, 2019

Paxos is a USD-collateralized ERC-20 stablecoin with monthly reserve audits, operated by the itBit exchange with approval from the New York Division of Financial Services (NYDFS) and the BitLicense.

Overview

Asset-backed stablecoins typically introduce some degree of counterparty risk—issuers vary in their practices of disclosing and evidencing the actual balance of stablecoins issued to assets held, ease and oversight in redeeming underlying assets, available legal recourse in contexts of insolvency, or with transparency about the location of asset holdings. These issues are particularly topical in the context of Tether, the market-leading fiat-collateralized stablecoin, which has faced various controversy surrounding its auditability and convertibility. Paxos offers an alternative stablecoin with monthly reserve audits through the Withum auditing firm and New York regulatory approval. Paxos is broadly similar to Gemini’s GUSD and Circle/Coinbase’s USDC.

Project Details

Paxos operates on the Ethereum blockchain as an ERC-20 token, with open source contracts governing the supply. After completing KYC procedures, users can mint new PAX stablecoins by wire transfer through the Paxos company, with no conversion fee. These stablecoins can be transferred off-platform to any Ethereum wallet. PAX can be redeemed instantly for USD, with no fee or minimums, at which point the tokens are burned on-chain. Intermediary holders are not subject to KYC checks, only those creating new stablecoins or redeeming them with PAX for USD. In order to comply with regulations, the PAX smart contracts define a Law Enforcement Role, which allows PAX to be frozen and seized in any wallet address; this functions as a global blacklist, and represents a key aspect of centralized control that the Paxos company (or regulators) has over the network. There have been no major blacklist cases to date, and Paxos has expressed in the Github repository that it will not take such measures of its own accord.

PAX is operated in tandem with the itBit cryptoasset exchange, which operates with NYDFS approval and holds a BitLicense. The Paxos Trust Company is a fiduciary, with all dollar deposits for PAX held in a variety of FDIC-insured US banks and/or collateralized by US treasury bonds. Similar to Gemini and Circle/Coinbase, Paxos’ business model is based on earning interest on the deposits and using the stablecoin as a liquidity mechanism on their exchange. In order to spur adoption as a trading mechanism, Paxos initially offered up to a 1% discount to OTC desks to use the stablecoin.

Stablecoins, like PAX, are anticipated to bridge gaps between cryptocurrencies and fiat. Stablecoin’s stability, in comparison to many cryptocurrencies’ volatility, makes them preferable to many users as a medium of exchange. Payment processors such as Bitpay have adopted Paxos as a means of payment. In turn, compared to fiat, stablecoins are simpler in respects to trade for cryptocurrency, with transfers being available during all hours. The emergence of effective, trustworthy stablecoins is expected to benefit many core elements of the overall distributed ecosystem: prediction markets, lending facilities, and insurance vehicles, in addition to a variety of other dApps.