PayPal Launches Stablecoin PYUSD: A Deep Dive into Centralized Stablecoin Smart Contracts

The cryptocurrency landscape witnessed a pivotal development on August 7, when financial giant PayPal announced the launch of its U.S. dollar-backed stablecoin—PayPal USD (PYUSD). This marks a significant milestone in the convergence of traditional finance and blockchain technology. Issued by Paxos and deployed on the Ethereum mainnet, PYUSD is poised to bring millions of PayPal’s existing users into the Web3 ecosystem.

Upon examining its smart contract code, it becomes evident that PYUSD shares a nearly identical codebase with USDP, another stablecoin issued by Paxos. The only notable addition in PYUSD is an external function called increaseSupply, which allows for controlled expansion of the token supply. This structural similarity underscores a growing trend among centralized stablecoins: reusing battle-tested, audited codebases to ensure reliability and security.

Centralized stablecoins are typically backed by fiat reserves—such as U.S. dollars—held in regulated financial institutions. These reserves serve as collateral for tokens circulating on-chain, maintaining a 1:1 peg to the underlying asset. In this article, we analyze key centralized stablecoins—including USDT, USDC, USDP, BUSD, and PYUSD—through the lens of their smart contract logic using Beosin VaaS, a leading blockchain security auditing platform.

Understanding Centralized Stablecoin Mechanics

At their core, centralized stablecoins operate under a custodial model. A trusted entity issues tokens based on verified reserves and maintains control over critical functions such as minting, burning, freezing, and blacklisting addresses. While this model introduces centralization risks, it also enables compliance with regulatory frameworks like KYC (Know Your Customer) and AML (Anti-Money Laundering).

Smart contracts govern these operations, but unlike decentralized protocols, they often include administrative privileges that allow the issuer to intervene in extreme cases—such as fraud detection or legal compliance.

Let’s examine how major stablecoins implement these features.

USDT: Functionality with Centralized Control

Tether (USDT) remains the most widely used stablecoin by market capitalization. Its Ethereum-based contract reveals several unique design choices that reflect its centralized governance model.

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1. Potential Transaction Fees

USDT includes two variables: basisPointsRate and maximumFee. These were originally designed to enable Tether Limited to charge transaction fees—up to a maximum of 50 USDT per transaction. However, both values are currently set to zero, meaning users transact without incurring additional fees.

This mechanism highlights a potential monetization path should Tether choose to activate it in the future, though doing so would likely face significant backlash from the crypto community.

2. Blacklist Capability

One of the most controversial features of USDT is its built-in blacklist functionality. If an address is added to the blacklist:

• It cannot call transfer() or transferFrom().
• Tether can invoke destroyBlackFunds() to zero out the balance of any blacklisted address.

This power grants Tether full authority to freeze and confiscate funds—a double-edged sword that ensures regulatory compliance but raises concerns about censorship and asset seizure.

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USDC: Simpler Design with Regulatory Alignment

USD Coin (USDC), issued by Circle, takes a more transparent and compliance-focused approach compared to USDT.

No Transaction Fees

Unlike USDT, USDC does not include any fee mechanisms in its contract. There are no hidden variables for charging users, reinforcing its reputation as a neutral and open payment rail.

Blacklist Without Fund Destruction

USDC implements a blacklist mechanism, but with stricter limitations:

• Any blacklisted address is blocked from calling any function in the contract.
• However, there is no equivalent to USDT’s destroyBlackFunds() function.
• This means Circle can freeze funds but cannot unilaterally erase them.

This design reflects a balance between regulatory responsibility and user protection—a principle increasingly valued in institutional-grade digital assets.

USDP, BUSD, and PYUSD: Shared Architecture with Enhanced Features

Stablecoins issued by Paxos—namely USDP, Binance USD (BUSD), and now PYUSD—share a common codebase, indicating a modular and scalable issuance framework.

1. Blacklist and Frozen Accounts

Like other centralized stablecoins, these tokens support freezing addresses via a frozen list. Once frozen:

• The address cannot transfer its holdings.
• The issuer can call wipeFrozenAddress() to reset the balance to zero—functionally equivalent to USDT’s fund destruction capability.

This feature ensures that illicit or compromised accounts can be neutralized swiftly.

2. Whitelist for Asset Protection

These contracts introduce an assetProtectionRole, which acts as a whitelist for privileged operators. Addresses assigned this role can:

• Freeze suspicious accounts.
• Call wipeFrozenAddress() to remove funds from frozen addresses.

This role-based access control enhances operational security while maintaining auditability.

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3. Gasless Transactions via Delegated Transfers

A standout innovation in the Paxos codebase is support for gasless transactions through two functions:

• betaDelegatedTransfer()
• betaDelegatedTransferBatch()

These allow users to sign transaction data off-chain while authorizing a third party (e.g., a relayer or wallet provider) to submit the transaction on their behalf—paying the gas fee. This enables:

• Seamless user experiences for non-custodial wallets.
• Lower barriers to entry for new users unfamiliar with gas fees.
• Scalable microtransaction systems.

This feature could become crucial as PayPal integrates PYUSD into its global payments infrastructure.

Comparative Summary: Key Features Across Major Stablecoins

While all major stablecoins incorporate blacklisting for compliance, Paxos-based tokens stand out with advanced features like role-based access and gasless transfers—offering both flexibility and improved user experience.

Frequently Asked Questions (FAQ)

Q: Is PYUSD fully backed by U.S. dollars?
A: Yes. PYUSD is issued by Paxos and claims to be 100% backed by U.S. dollar deposits and short-term U.S. Treasuries, held in regulated financial institutions.

Q: Can PayPal freeze or seize PYUSD funds?
A: Technically, yes. Like other Paxos-issued stablecoins, PYUSD supports freezing addresses and wiping balances via administrative functions—though such actions would likely be limited to legal or security-related cases.

Q: How does PYUSD differ from USDC or USDT?
A: PYUSD shares code with USDP and BUSD rather than USDT or USDC. Its key differentiators include support for gasless transactions and a more granular permission system via asset protection roles.

Q: Is PYUSD decentralized?
A: No. PYUSD is a centralized stablecoin, meaning issuance, redemption, and administrative controls are managed by trusted entities—PayPal and Paxos.

Q: Can individuals mint PYUSD?
A: No. Only authorized issuers (Paxos) can mint new PYUSD tokens. Users can only acquire them through purchases or transfers.

Q: Where can I use PYUSD?
A: Initially integrated within PayPal’s ecosystem, PYUSD may expand to decentralized applications (dApps), exchanges, and payment platforms supporting ERC-20 tokens.

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Final Thoughts

The launch of PYUSD represents a major step toward mainstream adoption of blockchain-based payments. By leveraging Paxos’ proven infrastructure, PayPal enters the stablecoin arena with a robust, compliant product designed for scale.

While concerns around centralization persist—particularly regarding freezing capabilities and lack of decentralization—the inclusion of innovative features like gasless transactions signals progress in improving usability for everyday consumers.

As more traditional financial institutions embrace blockchain technology, expect increased scrutiny, better transparency standards, and continued evolution of smart contract design across the stablecoin ecosystem.

For developers and users alike, understanding the underlying mechanics of these widely used assets is essential—not just for security, but for informed participation in the future of digital finance.