PayPal’s strategy of plying DeFi users with incentives is paying off.
The Solana version of the fintech giant’s PYUSD stablecoin just overtook its Ethereum counterpart, despite Ethereum’s 10-month head start.
More than $377 million worth of PYUSD now resides on Solana compared to $356 million on Ethereum, per DefiLlama data.
A winning strategy
Key to PYUSD’s success are the lucrative incentives offered to those using the dollar-pegged stablecoin in Solana DeFi protocols.
Each week, PayPal provides lending protocol Kamino and trading platform Drift with hundreds of thousands of dollars worth of PYUSD to distribute to users.
Depositing PYUSD on Drift earns users over 16% annually in kind, while Kamino offers users around 13%.
That’s significantly higher than the 3.5% yield users can earn lending PYUSD on Aave, Ethereum’s biggest lending protocol, where PayPal isn’t juicing the yields.
The incentives have increased demand for PYUSD.
After more than doubling its market share over the past month, PYUSD is now the third largest stablecoin on Solana behind Circle’s USDC and Tether’s USDT, according to DefiLlama.
PayPal first launched its PYUSD stablecoin on Ethereum in August 2023.
Shortly after, the firm hired liquidity management provider Trident Digital to help grow the stablcoin’s use.
In January, Trident used so-called DeFi bribes — offering incentives to those who provide liquidity for a specific asset — on decentralised exchange Curve Finance.
But the stablecoin market on Ethereum is highly competitive, making it difficult for new entrants to compete.
Since launching PYUSD on Solana in May, PayPal appears to be focusing its attention there rather than on Ethereum.
Can the incentives last?
PYUSD is a dollar-backed stablecoin. This means that for every PYUSD issued on a blockchain, the firm holds a dollar, in cash or an equivalent, in reserve.
Issuers don’t have to keep all the funds backing their stablecoins entirely in cash.
Tether, the biggest stablecoin issuer with over $116 billion of its USDT stablecoin in circulation, keeps $80 billion of its reserves in yield-bearing US treasury bonds.
Interest rates in the US currently sit between 5.25 and 5.50%.
In the first half of the year, Tether earned a whopping $5.2 billion in profit, driven by the yield on the bonds it holds.
Assuming PayPal operates a similar strategy with its reserves, the amount it gives out through incentives is only a fraction of the overall yield it generates.
If the Federal Reserve starts to cut interest rates in September, as many analysts forecast, it could impact PayPal’s incentives.
Tim Craig is DL News’ Edinburgh-based DeFi Correspondent. Reach out with tips at tim@dlnews.com.
