Pax Dollar

What is Pax Dollar (USDP)?

Pax Dollar, formerly known as Paxos Standard, is a stablecoin backed by a fiat currency issued by Paxos.

Stablecoins are cryptocurrencies that are pegged to fiat currencies like the U.S. dollar by various mechanisms and provide traders with a fast, unrestricted, borderless settlement.

There are many other stablecoins on the market, including USDT, BUSD, USDC, Dai, and TrueUSD. USDP is similar to some of them in that it is backed by fiat, in this case, real dollars that are held in reserve.

Stablecoins give traders the ability to trade in the relative, short-term safe haven of a major fiat currency’s stability during times of high volatility in the crypto markets. Since cryptocurrencies settle fast, stablecoins allow traders to jump back and forth from more volatile assets to the stable fiat equivalent without waiting days for settlement.

A lot of investors who see the U.S. dollar itself as a store of value may also be able to access stablecoins like USDP far more easily than they can access the dollar itself.

When Was Pax Dollar Launched?

Pax Dollar was launched as an ERC-20 token on Ethereum in September 2018, although it was known back then as Paxos Standard with the ticker PAX.

The change in branding, announced in August 2021, brings it in line with the majority of other stablecoins whose ticker contains that of the U.S. dollar (USD) within. Joining the likes of USDT, BUSD, USDC, and more, USDP is now far more recognizable as a dollar-pegged stablecoin.

The launch of PAX at the time was notable as it could boast of being the world’s first regulated stablecoin thanks to Paxos's securing of a New York State Department of Financial Services Trust Charter for Digital Assets.

Who are the Founders of Pax Dollar?

Pax Dollar, in its previous incarnation of Paxos Standard, was created by blockchain company Paxos. Paxos provides blockchain solutions in the areas of tokenization, custody, trade, and settlement of assets for enterprise clients.

Paxos was founded by Charles Cascarilla and Rich Teo, and the company’s first major project was the first regulated cryptocurrency exchange, itBit.

Alongside his co-founding of Paxos, Cascarilla is a partner at Cedar Hill Capital Partners. He has extensive fund management experience, having been a portfolio manager at Claiborne Capital Management, a financial analyst at Goldman Sachs, and an analyst at Bank of America.

Teo also worked at Cedar Hill in the capacity of principal/senior analyst and was previously a financial analyst at Citi.

What is a Stablecoin?

A stablecoin is a type of cryptocurrency token that, through one mechanism or the other, is able to stay pegged to the value of a given fiat currency.

The mechanism that ensures that the stablecoin holds its value defines what type of stablecoin it is. The main types are algorithmic stablecoins, crypto-collateralized stablecoins, and fiat-collateralized stablecoins. There are also hybrid stablecoins that combine features of the others. Here’s how they differ:

• Algorithmic stablecoins. These tend not to be backed by any assets in reserve, and their value is maintained by various algorithmic mechanisms.
• Crypto-collateralized stablecoins. These are backed by various cryptocurrencies held in reserve. Dai is the top crypto-collateralized stablecoin in the industry.
• Fiat-collateralized stablecoins. These are backed by fiat currency in reserve, although some projects also use fiat equivalents such as treasury notes. Pax Dollars are fiat collateralized, and so is USDT.
• Hybrid stablecoins. These stablecoins could use a mixture of the other mechanisms. The failed UST (TerraUSD), for example, used algorithmic facets but also had BTC in its treasury.

How Does Pax Dollar Work?

As mentioned, Pax Dollar is a fiat-collateralized stablecoin, meaning that it has fiat dollars in reserve to help USDP maintain its peg. Paxos holds accounts with several U.S. depository institutions, and users send U.S. dollars to one of these accounts in order to receive USDP.

Once users’ funds reach these accounts, Paxos mints an equivalent amount of USDP via a smart contract and sends these tokens to the user. To redeem their funds, users can send USDP back to Paxos, and these tokens are burned via smart contracts. Then, the user’s fiat can be returned.

What are Smart Contracts?

Smart contracts are pieces of code that execute predetermined actions when a set of specific conditions are met. Deployed on programmable blockchains like Ethereum, these smart contracts are immutable and fully open source. This allows users to audit them with the knowledge that they can’t be changed once live.

These smart contracts are facilitated by Ethereum, on which USDP exists as an ERC-20 standard fungible token. Ethereum is a highly secure and extremely decentralized blockchain that can execute smart contracts thanks to the Ethereum Virtual Machine.

What Makes Pax Dollar Unique?

One of the defining characteristics of Paxos is its charter from the New York State Department of Financial Services which allows the company to offer regulated cryptocurrency services.

This regulatory aspect sets it apart, and while many other protocols offer tried-and-tested services, official backing is valued by many customers. The NYDFS charter also means Paxos is subject to a higher level of regulatory oversight than most other providers.

The USDP token, meanwhile, is held at U.S. depository institutions that are also meant to inspire trust and confidence from depositors. To further that, Paxos makes monthly disclosures regarding the supply of the USDP tokens in circulation and the reserve holdings.

Paxos also works with Withum, an independent auditor, to verify that the USDP supply is consistent with USD reserves in Paxos’ U.S. bank accounts.

How is the Pax Dollar Network Secured?

Pax dollars do not have their own network. Instead, they exist as ERC-20 tokens on the Ethereum blockchain. This means that they also rely on Ethereum for validation of transactions and security.

Ethereum is secured by miners showing proof-of-work, a form of consensus supported by a large number of computers powering the network. However, Ethereum is currently in the testnet stage of its proof-of-stake update, a change that will improve Ethereum’s security and make it far more energy-efficient.

What is the Use of USDP?

The main use of USDP is for trading. The majority of trading on cryptocurrency exchanges is done with stablecoin trading pairs, eliminating the double price risk of prior times when most cryptocurrencies had to be traded against other cryptocurrencies.

In offering a trading pair against cryptocurrencies, USDP provides a relative safe haven. Cryptocurrencies are far more volatile than most other assets, meaning that traders are often exposed to major fluctuations in asset value. USDP offers a short-term safe haven from price fluctuations since it is pegged to the relatively stable U.S. dollar.

USDP also offers an excellent way to move money across borders. Thanks to the extremely fast, borderless, and low-cost settlement of blockchain networks, USDP can be sent to any wallet regardless of where the wallet owner lives.

USDP can also be a store of value in countries where economic conditions, such as inflation, rapidly chip away at the value of the local fiat. In these countries, the U.S. dollar is looked at as a store of value, and the USDP is both pegged to and backed by the USD.

Who Controls Pax Dollar?

Pax Dollar is controlled by Paxos, the blockchain company chartered to offer cryptocurrency services by the New York State Department of Financial Services.

Paxos was founded by Wall Street veterans Charles Cascarilla and Rich Teo. Investors in the company include OakHC/FT, Declaration Partners, Mithril Capital, and PayPal Ventures.

The company’s clients are veritable who’s who of Wall Street, including the likes of Bank of America, Credit Suisse, Mastercard, Interactive Brokers, PayPal, Mercado Libre, ABN-AMRO, Society Generale, and Nomura.

Koch Industries, one of the largest privately held companies in the U.S., is also a client of Paxos.

How Much USDP Is In Circulation?

The amount of USDP in circulation is dynamic because users are constantly causing more to be minted via depositing dollars and requesting redemptions, leading to USDP being burned.

You can make sure the amount of USDP in circulation is consistent with the holdings of the Paxos Trust Company by viewing their monthly reports.

Currently, there are just over 945 million USDP tokens in circulation.

How Do You Buy USDP?

USDP is a regulated stablecoin and can be purchased across several major cryptocurrency exchanges. Thanks to the partnership between the two companies, Binance is one of the best places to buy USDP. This partnership has also given birth to another stablecoin, BUSD.

You can purchase USDP using other stablecoins, such as USDT and BUSD, or purchase it with fiat. Cryptocurrencies like BTC, BNB, and ETH can also be used to purchase USDP.

Since USDP is an ERC-20 token, it can also be purchased on various decentralized exchanges on the Ethereum blockchain.

You can also use the Paxos platform to purchase USDP by sending Paxos your fiat and receiving USDP in exchange.

Is It Possible to Buy USDP Instantly?

When purchasing USDP using a decentralized exchange on Ethereum, settlement speed depends on how fast the blockchain’s consensus is. As soon as a new ETH block is mined, your USDP will hit your wallet.

Purchasing through a service like Paxos using fiat may take a little longer since fiat settlement can take a while. Credit card companies usually have quicker settlement times, but bank transfers and wires can take longer.

Finally, purchasing USDP on a centralized exchange’s order book may seem instant, but the funds don’t actually move to your wallet. Instead, the amounts in your account are simply a reflection of the trades you make. The actual settlement only happens when the funds are transferred into a private wallet.

How Do You Store USDP?

You can store USDP in your exchange account or a private, Ethereum-compatible wallet.

An exchange isn’t really a wallet, but rather a large pool of funds in the exchange’s name, out of which a small portion is allocated to the individual user. However, with private wallets, you can take full custody of your funds.

The first type of private wallet, the cold wallet, is often considered safer, as it is kept offline. Simply writing down the private key on a piece of paper or saving it on an offline hard drive both count as cold wallets.

Hot wallets, meanwhile, are those that connect to the internet. They often take the form of either third-party wallets that use the hardware of the provider or of desktop clients that are stored on the user’s hardware but require an internet connection.

Browser extensions like the widely used Metamask and the highly-rated GameStop wallets are two examples of Ethereum-compatible hot wallets.

Pax Dollar Energy Consumption

Since USDP doesn’t run its own blockchain and doesn’t need any sort of consensus mechanism, it requires no computing power or network of computers for support.

However, it does run on Ethereum, which requires miners and has a high energy cost associated with it. USDP demands only a fraction of their throughput, however, as Ethereum serves as the foundation for a huge ecosystem of tokens, applications, and smart contracts.

This fraction of Ethereum’s energy consumption lies in stark contrast to the energy consumption of the actual U.S. dollar’s infrastructure. Given that this includes printing facilities and security in many countries, vaults and storage facilities, transport, and so on, it is vast enough to make even quantifying it difficult.

Is USDP a Good Investment?

USDP doesn’t offer any potential to appreciate beyond the U.S. dollar, which over the past few years has been significantly outperformed by plenty of cryptocurrencies. Even Bitcoin started at a valuation of a few cents and increased to tens, hundreds, thousands, and now even tens of thousands of dollars.

However, a stablecoin or a stable fiat currency can be a good investment in the context of a volatile or downward-trending cryptocurrency market. Investors residing in countries affected by inflation and currency depreciation greater than that of the U.S. can also expect gains from USDP compared to their local currencies.

Holding fiat currency for the long term also tends to be a poor idea, given the inflation and long-term devaluation of currency caused by central bankers’ persistent issuance of new money.

Ultimately, stablecoins are meant to be used, and USDP is a more liquid version of the dollar that can be transacted—and settled—almost instantly. This means that traders can be more agile when using USDP as a medium of trade or a way to book profits.

Unfortunately, it could be argued that owning a stablecoin, a cryptocurrency equivalent to a fiat currency, is a risky proposition.

A ‘bank run’ or mass redemptions of fiat could threaten Paxos because a certain amount of the USDP reserves tend to be held in dollar equivalents. These dollar equivalents, usually Treasury Bills and Bonds, are rated highly but may be illiquid in the context of a bank run.

Furthermore, Central Bank Digital Currencies, or CBDCs, are a potential threat whose implications are unclear. While increasingly discussed in many forums, they have yet to be adopted. Still, the emergence of ‘official’ digital dollars may lead to a crackdown on USDP and other stablecoins.

Finally, any sort of threat to the underlying blockchain, Ethereum, could also constitute a risk to USDP holders since account balances are updated on-chain.