Original title: "Analysis of the internal logic of Paypal's stablecoin payment and the evolutionary thinking towards Mass Adoption"
Author: Will Awang
On May 31, 2024, PayPal announced that its stablecoin PayPal USD (PYUSD) was launched on the Solana blockchain. This is another major milestone since Paypal first launched PYUSD on the Ethereum mainnet in August last year. It not only provides its users with a new and efficient payment method, but also provides an important reference for the future trends of the entire payment industry.
When writing a research report on Web3 payments and discussing with industry companies, I have been thinking about a question: Is stablecoin payment really necessary? Coincidentally, PYUSD was launched on Solana. Paypal gave an answer about payment freedom from a very pragmatic perspective:
“People want to pay as they please, but the current payment network can hardly meet the demand. Crypto can meet the demand and is practical. As a fintech company committed to promoting payment innovation, we will launch a stablecoin payment solution to meet people’s current payment needs as they please.”
Therefore, this article will try to analyze the internal logic of Paypal turning its attention to Crypto, the stablecoin payment solution launched by Solana for PYUSD, and the evolution of PYUSD towards Mass Adoption. I hope it can provide reference for the industry, and welcome exchanges and discussions.
1. Why Paypal turned its attention to Crypto
As a leading global payment company, PayPal has more than 20 years of global payment experience. During these 20 years, along with the mature development of e-commerce, PayPal has not only built itself into a beacon of trust and provided users with trust endorsement for transactions, but also achieved large-scale popularization and application of Internet digital payment networks (Digital Payments).
Paypal's original intention has not changed - to promote payment innovation and enable everyone to pay as they wish.
But to date, payment innovations have been built on the same basic financial rails that enabled the rise of the Internet. While the industry has been working hard to provide global, instant and seamless transactions, the reality often falls short:
Online payments still take a long time to settle (2-3 days on average in the U.S.), and markets, banks, and service providers need to be open on weekdays, further extending settlement times; employers struggle to pay an increasingly distributed workforce; an increasingly global population struggles to send money across borders cheaply and efficiently; businesses feel this friction most, while consumers still experience long waits in payments environments that they believe should be fast.
Simply put, people today are not able to pay the way they want.
This is why Paypal turned its attention to Crypto, and the answer is simple: it meets a need and is practical.
Cryptocurrency and blockchain technology can bring people closer to their payment aspirations: fast, cheap, and global payments. This new next-generation financial/payment infrastructure can help PayPal better serve its 40 million users and enable everyone to pay as they wish.
So, more than a decade after the advent of cryptocurrencies and blockchain technology, PayPal has once again arrived at a critical moment in payment history that, like the internet in the early 2000s, is full of potential and opportunity.
Just as Paypal previously brought payments online, Paypal is now bringing payments to the blockchain.
(flywheeldefi.com/article/paypal-steps-on-chain-with-pyusd)
2. Global payment difficulties need to be improved
Current payment channels and information transmission protocols (such as ACH, SEPA and SWIFT) constitute the global payment network. They enable us to conduct large-scale transactions across regions and time zones and ensure the relative smoothness of payments. However, at the same time, current payment technologies also force us to make trade-offs between 1) payment settlement speed and 2) cost-effectiveness, such as:
The transfer of funds will incur costs, and there needs to be prior cooperation arrangements and liquidity requirements between the various intermediaries involved in the transfer;
The cross-time zone operating timeframes (business days) and batch processing of all parties mean that payments may take several days to settle;
Net settlement arrangements are unlikely to meet the needs of small-value, high-frequency transactions.
However, as adults, we don’t make a choice, we want both – efficient settlement at a low cost.
What people want is easier payments. Businesses want to pay suppliers without having to worry about settlement time; individuals want to send money to distant family members without paying high fees and waiting days. Today's financial infrastructure cannot quickly meet people's needs for fast transactions, and Paypal does not want users to lose value in this waiting.
Today, cryptocurrencies and blockchain technology offer a whole new payment gateway that simplifies the payment clearing process, making payments fast, cheap, and accessible.
Therefore, we need to use cryptocurrency and blockchain payment technology solutions to solve the legacy problems of traditional payments: 1) slow settlement time; 2) high transaction costs; and 3) incompatibility with under-banked and unbanked regions around the world that are not covered by the current financial system.
3. Paypal’s Stablecoin Payment Solution
(Payment giant Paypal's stablecoin is expected to lead the crypto industry into the mainstream)
Stablecoin definition: Most cryptocurrencies have high price fluctuations and are not suitable for payments, just like Bitcoin can fluctuate greatly in a day. Stablecoins are cryptocurrencies that aim to solve this problem by maintaining a stable value, usually pegged 1:1 to a fiat currency such as the U.S. dollar. Stablecoins have the best of both worlds: they maintain low daily volatility while providing the advantages of blockchain - efficient, economical and globally applicable.
PayPal's stablecoin PYUSD is a new stablecoin payment solution designed to achieve the next generation of financial technology innovation. PYUSD is built on PayPal's deep payment industry accumulation and Solana's high-performance blockchain, enabling efficient instant settlement, reduced transaction costs, high security and truly global payments.
PYUSD is a stable value storage tool (1:1 USD exchange) based on blockchain launched by Paypal. Its emergence will solve the above problems in the current global payment industry. Qualified US users can buy, sell, send, and receive PYUSD and use it for payment:
Purchase and transfer PYUSD within the PayPal and Venmo ecosystems for a smooth deposit and withdrawal experience;
Use PYUSD payments as a payment method for online transactions, such as checkout and payments at millions of PayPal merchants worldwide;
PYUSD cross-border P2P payment on Xoom (cross-border payment tool);
Outside of the PayPal ecosystem, PYUSD can be used on cryptocurrency exchanges (such as Crypto.com) and wallets (such as Phantom);
PYUSD can also be used for various innovations. For example, PYUSD can be used as a fast and low-cost financing tool for venture capital such as Mesh.
PYUSD is building a true stablecoin business scenario, providing the nearly frictionless and trustworthy payment experience that mainstream consumers and merchants expect.
4. Paypal’s Evolution of Stablecoin Payments towards Mass Adoption
Based on Paypal's nearly 20 years of global payment compliance experience and PYUSD's highest compliance standards, the combination of PayPal + PYUSD can upgrade previous stablecoin transactions to become the stablecoin payments we really need.
When Paypal was first established, its responsibility was not only to promote the implementation of payments, but also to introduce and spread a new technology - digital payments. This digital payment method has now been integrated into our lives and is everywhere. This successful experience can provide experience guidance and novel insights for the launch of PYUSD stablecoin payments. Specifically, Paypal divides the evolution of Mass Adoption into three stages:
Awareness
Payment Utility;
Ubiquity.
4.1 Awareness through Introduction
As mentioned earlier, payments are ubiquitous and deeply embedded in habits and practices, so the transition needs to be gradual and steady, and this transformation will not happen overnight. Introducing a new payment method is both a behavioral change and a technological or financial change.
The first step toward mass adoption is cognitive awakening—simply introducing people to the fact that new technology exists.
At this stage, early adopters are the target audience, i.e. holders of cryptocurrencies - a group that accounts for about 15% of the global population and is relatively easy to reach. This is why Paypal launched PYUSD on Ethereum at the end of 2023, ensuring the awareness of early adopters.
Now that PYUSD is launched on Solana, the second-largest high-performance blockchain in terms of market value, it can reach the most active and active people in the crypto ecosystem and let the world know that "PYUSD is really here."
In addition, the integration of PYUSD with PayPal and Venmo applications will bring it to more than 100 million American users. In the future, we will continue to work with crypto exchanges and payment partners to expand the influence of PYUSD outside the PayPal ecosystem.
Paypal knows from its previous successful experience that in order to make a new payment mechanism accessible to the public, ideological awareness is the necessary first step.
4.2 Utility through Integration
The next step in adopting new payment technologies is to achieve payment utility, that is, to transform the initial ideological cognitive awakening into payment utility in real life, just as PayPal established PayPal through eBay in its early days as a platform for providing trusted transactions between two parties who do not know each other.
Today, people need payments that are fast and cheap. Although Paypal’s launch of PYUSD on the Ethereum mainnet has provided it with huge visibility, it does not fully meet all the standards required for PYUSD to fulfill its mission as a digital commercial payment tool - efficient, economical and globally applicable.
Therefore, PYUSD turned to Solana to achieve payment utility.
(PayPal launches Solana-based US dollar stablecoin: a new chapter in blockchain payments)
Solana is a high-performance blockchain network built for finance, payments, loyalty programs, etc. It is one of the most adopted blockchains. In the fourth quarter of 2023, an average of 40.7 million transactions were processed per day, and 2,500 developers were active in the ecosystem. In addition, the open source, programmable, and composable nature of its blockchain can also bring huge space and network effects.
Solana brings PYUSD a much faster settlement speed, lower transaction costs, stronger scalability, and global network support than other blockchains. After combining the advantages of Solana, users can truly realize payment utility when using PYUSD:
Real-time settlement: Most PYUSD transactions are efficiently settled within seconds;
Low transaction costs: Transaction costs on the Solana chain are only a few cents, regardless of the transaction amount;
Transaction finality: Merchants do not have to worry about customers canceling payments due to insufficient funds or other reasons;
24/7 trading: Available 24/7/365;
Interoperability: PYUSD can be used outside the PayPal ecosystem to achieve interoperability with other gateways, networks, and wallets;
Programmability and composability: PYUSD is developed on the widely adopted SPL token standard. This means that any product that supports the standard automatically supports PYUSD. Developers are free to experiment and build within and outside the PayPal ecosystem. Consumers, merchants, and institutions can enjoy a wide range of third-party developer experiences, leveraging PYUSD for payment and financial use cases;
Paypal’s Large User Base: PYUSD is available to the existing eligible US PayPal customer base.
Therefore, launching PYUSD on Solana will help the long-term adoption of stablecoin payments. In the process, it will move PYUSD from the cognitive awakening stage to the actual payment utility stage.
With the launch of PYUSD on Ethereum and Solana, more developers and ecosystem partners will be involved, and combined with its practicality on PayPal and Venmo applications, PYUSD will provide users with more practical and user-friendly use cases.
4.3 Ubiquity through Assimilation
The final stage of adoption of any new payment technology is ubiquity, which is characterized by the seamless integration of the technology into daily life. At this stage, people are able to use the new payment technology effortlessly and without any awareness - people are simply paying as they please.
For PayPal, it makes digital payments a way for people to send money to each other and businesses in more than 200 countries, as a safe, reliable, standardized P2P, B2B and B2C payment method that is becoming ubiquitous as digital globalization grows.
5. PYUSD Stablecoin Payment Use Case on Solana
To make dreams come true and allow people to pay as they please, slogans alone are not enough. Let’s take a look at some of the implementation scenarios of PYUSD.
5.1 Cross-border peer-to-peer remittance (P2P)
Today, individuals are more economically connected than ever before around the world. However, transferring money between individuals across borders is a large and growing market full of opportunities. Fiat remittances to low- and middle-income countries will reach $669 billion in 2023 (World Bank data), but cross-border remittances are not cheap.
Using PYUSD, payers can send funds directly to recipients using a Solana wallet, with transfers settled almost instantly and at near-zero cost.
Even for payees who do not have a Solana wallet, payers can save the cost of cross-border remittance services by working with PYUSD’s payment service provider. The payment service provider connects to the fiat cash network through PYUSD’s local partner bank, allowing payees to easily convert PYUSD into bank deposits or cash, thereby enjoying near-instant, low-cost global remittance services.
5.2. Business-to-business transfers (B2B)
Due to the complexity of cross-border payments, with multiple intermediaries and a network of correspondent banks spanning multiple countries, most B2B payments can take days to settle. And, depending on how the funds are moved across borders, payment fees can be high.
By leveraging the programmable nature of PYUSD, businesses can build their own services to seamlessly create near-instant, cost-effective ways to transfer money across borders with relatively low technical requirements. Teams can also create smart contracts to manage the flow of PYUSD between accounts. This can improve the speed and accuracy of supplier payments (or any other B2B payments governed by contractual agreements).
Additionally, adopting PYUSD transfers does not necessarily require businesses to own PYUSD or even interact with PYUSD. Payment service providers can build B2B payment products that provide a fiat experience to end users.
5.3. Global Payment (B2C)
PYUSD can significantly reduce the complexity of global payments. Instead of having to go through a complex network of unique regional bank accounts, different currencies, correspondent banks, and digital wallet tracks, PYUSD can be paid to any compatible wallet address. Additionally, programmable smart contracts using PYUSD can enable corporate payers to automate payment processes more efficiently and even pay wages in real time.
5.4. Small Transactions
Traditional payment processing systems struggle to support small transactions due to high transaction fees. As a result, platforms that process small transactions typically process payments in batches, which involves complex payment engineering, increases risk, and prevents platforms from accepting microtransactions.
However, PYUSD on Solana will enable merchant platforms to easily process microtransactions in near real-time and at low cost. Microtransactions support a variety of use cases such as tipping, in-game purchases, and small payments to content creators per read or view.
5.5. Web3 Payment
Many Web3 merchants (such as NFT marketplaces and blockchain-based gaming platforms) lack connectivity to traditional fiat bank accounts and require robust, non-volatile payment solutions, which PYUSD + Paypal can provide.
6. Final Thoughts
“PayPal USD was created to once again revolutionize commerce by providing a fast, simple and inexpensive way to pay for the next evolution of the digital economy,” said Jose Fernandez da Ponte, senior vice president of blockchain, cryptocurrency and digital currency group at PayPal. “Offering PYUSD on the Solana blockchain furthers our goal of enabling a digital currency with a stable value designed for commerce and payments.”
We can see that PYUSD has been tepid since its launch on Ethereum last year, and it has been running more in Paypal's Supper App. Whether it is to break the circle or to explore further, the launch of Solana this time is undoubtedly the killer application of Web3, which may have arrived, and it is payment!
As we said in our previous Web3 payment research report: The biggest opportunity for cryptocurrency may not be to view it as a cryptocurrency, but to view it as a new set of payment methods.
Payment carries the important mission of connecting the on-chain cryptocurrency system with the off-chain legal currency system. After being transformed into tokens through blockchain technology, it will give new value to the traditional monetary system, overcome boundaries that were previously impossible to break through, and the world economy may be changed forever.
