"PayPal's stable cryptocurrency - important for legitimacy, but not a significant step forward." | Blog

"PayPal's stable cryptocurrency - important for legitimacy, but not a significant step forward."

In order for cryptocurrencies to be widely accepted, the traditional financial system (TradFi) and the decentralized financial system (DeFi) must join forces and together usher in a new era of financial evolution. This merger is key to mass adoption, but it will require more time and collaboration.

Hope for PayPal

Against the backdrop of the US's hostility towards cryptocurrencies, a ray of hope has emerged. PayPal has taken a historic step by becoming the first major American payment service to introduce a stablecoin called PayPal USD (PYUSD), which is pegged to the US dollar. The involvement of a large global payment service is a turning point for the cryptocurrency industry, as it instills a new level of trust in the often turbulent crypto environment.

Caution is necessary.

However, it is important to exercise caution and acknowledge that the full impact of PayPal's entry into the crypto space will only be realized when several key components fall into place.

In its current form, PYUSD can only be used within PayPal's own ecosystem, which limits its strength as a stablecoin. For PYUSD to become a fully-fledged product, it needs to be transferable between Web2 and Web3 and operate on multiple blockchains. To achieve this, PYUSD should also be listed on centralized and decentralized exchanges. Such action would allow PYUSD to gain the necessary liquidity to support its use on centralized and decentralized exchanges, DeFi protocols, and blockchains, thereby unlocking its true potential.

Several obstacles

Thus, while the Web3 project by PayPal certainly deserves attention, it represents only a small victory in the larger battle for the legalization of cryptocurrency as a globally recognized and regulated industry. This is yet another case of isolated progress that highlights the need to establish numerous connections between TradFi and DeFi before the merger is complete.

Overcoming the gap

Bridging the gap between TradFi and DeFi will require time and collaboration, leveraging the various advantages of each sector. Traditional financial institutions offer more reliable risk management strategies than DeFi protocols and, by their nature, provide a safer and more secure environment, making them appealing options for those who are cautious about digital assets. DeFi innovations offer users greater transparency and autonomy, and can attract an audience that has historically been excluded from financial systems.

The role of PayPal

This is where the legacy of PayPal's innovation and stability comes into play. PYUSD provides a safer entry point for investors unfamiliar with cryptocurrencies and benefits from PayPal's reputation for stability, security, and regulatory compliance. However, its highly centralized nature also presents challenges. Non-banks still do not have access to PYUSD or Web3, as PayPal requires users to have a bank account. Moreover, even if PayPal offers this service outside of America, we must question its effectiveness, considering that the developing world does not widely use this service.

Therefore, PYUSD can still benefit from the autonomy of DeFi, and DeFi can also significantly benefit from the existing PYUSD network.

Isolated events

The launch of PayPal's stablecoin is one of many notable but isolated events related to financial companies in 2023. Recently, many leaders in the financial world have announced their growing interest in the crypto industry. For example, Jacobi became the first to launch its Bitcoin fund on a European exchange. Visa is actively testing the possibility of paying gas fees in fiat currency using a credit or debit card. Additionally, institutional participation in liquid staking has tripled since the Shanghai upgrade.

The path to mass adoption

Although these events help change the reputation of cryptocurrency assets from merely risky ventures to reliable investment options, they remain isolated as they have not yet facilitated a smooth transition between Web2 and Web3. For example, PYUSD can only be used by PayPal customers in the US through Venmo, so it provides only affluent Americans with another way to conduct transactions using a digital representation of the US dollar.

Simplification for mass adoption

One of the main barriers to the widespread adoption of cryptocurrencies is that they can be confusing for the average person, filled with complex technical terms and nuances. Here, traditional financial institutions and Web2 technology can play a key role in simplifying information and making it more accessible to a broader audience.

However, relying on the traditional financial sector to attract new users without the DeFi ecosystem carries high risks. The potential of the traditional financial system is limited in reaching all demographic groups, especially the unbanked, as profit motives can lead to neglect of marginalized communities. In this case, collaboration between TradFi and DeFi becomes important. DeFi offers transparency, autonomy, and accessibility, in contrast to the often opaque and exclusive nature of TradFi.

The necessity of cooperation

Merging currently represents several lines in the sand, slowly coming together. The merging of these lines will be the key to the mass adoption of cryptocurrencies, but achieving this will require time and collaboration.

Macroeconomic conditions

For comprehensive development, certain factors are required, and macroeconomic conditions play an important role in facilitating market turnover. For example, the current high interest rates deter institutional investments in cryptocurrencies, as they offer investors lower returns compared to bonds. When inflation decreases to more reasonable levels and governments begin to lower interest rates, we will start to see greater institutional participation in the cryptocurrency space.

It is also important to consider the skeptical attitude towards blockchain from the general public. Although progressive steps are being taken on a global scale, their impact remains localized.