There are few patterns in the crypto market more noticeable in 2019 than that of stablecoins. Along with the tokenization of traditional assets, like real estate, the general trend has gone away from startups attempting to raise money quickly through ICOs. Instead, it has moved towards a more fundamental ideas about how blockchains and cryptocurrencies can be used - stablecoins for trading and beating volatility, tokenization of real world asset securities, and so on.
As far as stablecoins are concerned, there are several reasonable motivations for their sudden surge in 2019. Stablecoins, which are just digital currencies pegged on a 1:1 ratio with a fiat currency like the United States Dollar, benefit several entities, from financial institutions to the retail investor. Unlike other tokens, which generally have no jurisdictional limitations, multiple stablecoin competing against each other can reasonably coexist, as they may be targeting different markets (this is not ideal, but there is more leeway than for, say, smart contracts focused projects).
Make no mistake, there is an incredible amount of utility to stablecoins and there wouldn’t have been such a quick growth in the niche if there wasn’t. Most stablecoins function effectively the same though some, like that of the dual coin MakerDAO ecosystem, operate quite differently.
The stablecoin we’ll be looking at today is Paxos Standard (PAX), a token which the team describes as the world’s first regulated crypto asset. We’ll look at its history, the markets it operates in, its focus on following regulation and how it might be competing with the several other stablecoins in the market.
History of Paxos (PAX)
Paxos Standard (PAX), Paxos for short, was launched in September 2018. The token follows the ERC-20 protocol, and has its origins in the Paxos Trust Company, which was formed in 2012 by Charles Cascarill and Richmond Teo. From the get go, Paxos has ensured that it has followed all regulations.
The Paxos Trust Company provides payments, settlement and asset services, and decided to enter the cryptocurrency market with the Paxos Standard stablecoin in 2018, being the issuing authority behind the tokens. The tokens are backed by US dollars stored in segregated accounts at FDIC-insured, U.S.-domiciled banks. Customers’ dollars are counted as customers’ properties. Auditing is carried with third party accounting firms, while the blockchain code has itself been audited by blockchain auditing firm Nomic Labs.
Paxos was initially available for trading by Paxos’ digital currency exchange ItBit; it is now available on several exchanges, including Binance. In total, there are over 100 exchanges that have listed PAX. There are several other entities, performing different functions, that also work with Paxos, which we describe later.
The Purpose of Paxos (PAX)
The motivation for developing Paxos, according to the official statement, is “so that money can move fast.” The token cannot be mined or staked, but must be bought through exchanges or traded. The token is meant to improve upon the basic functions of money i.e. it aims to “combine the trust and stability of fiat currency with the utility and immediacy of digital assets.”
Being an improved version of fiat currency, but marrying the properties of the latter with the benefits of blockchain technology, the PAX token is essentially a digitized version of the dollar. This includes being ready for transactions 24/7 with near instant settlement, besides being more secure than its fiat counterpart.
Envisioned use cases include being a means of payment, hedging during times of volatility, 24/7 settlement systems, and more complex and programmable transactions using smart contracts.
The Paxos project has also launched PAX Gold, an asset that is backed by gold on its blockchain. Each PAX Gold token is backed by one troy ounce of London Good Delivery gold stored in vaults in London. As mentioned before, the tokenization of traditional assets is another major trend of 2019.
More recently, the project launched the Paxos Settlement Service, after having received a no-action relief from the United States Securities and Exchange Commission (SEC). The Paxos Settlement Service is a private blockchain that allows for faster and cheaper settlement of equity trades. The team states that this is the first time that blockchain technology has been applied to transaction processing of public US equity trades - which they believe will lay the foundation for a modern and open market infrastructure. The official announcement hints at the technology being used for additional asset classes, transaction types and geographies, allowing businesses to build additional revenue streams and business lines.
The earliest adopters of this technology will be Credit Suisse and Société Générale, two well known French institutions (who are very keen on blockchain technology, having partnered with Ripple).
While PAX is primarily used to beat the volatility of the market, the team has stated that in the future they envision it as being “used for consumer payments, offering a stable store of value for those outside the United States that face currencies with unpredictable volatility.” The last half of that statement likely refers to nations whose economies or governments are facing turmoil. The citizens of such nations already turning to cryptocurrency simply to make ends meet, as their respective national currencies are subject to incredible levels of inflation.
Paxos’ white paper offers a more detailed explanation of the motivations and goals of the PAX stablecoin.
Partnerships and Developments
Ecosystem development is another key priority of the project, with exchanges, payments systems, wallets, OTC traders and lending platforms forming the bulk of the project’s ecosystem.
Earlier this year, it was announced that Paxos would partner with Ontology, the enterprise focused blockchain that offers such services as a decentralized identity management system, decentralized data exchange and collaboration framework and more. The partnership will see up to 100 million PAX tokens released on the Ontology blockchain. This makes the PAX token available on the Ontology blockchain, the only one besides the Ethereum blockchain.
Paxos has done well to build a large ecosystem of players, one that continues to grow. By building a fundamental network of players that rely utilize the PAX token, Paxos is establishing greater liquidity and market reach. This is a very good sign for the token. Members include the lending platform Nexo, which has received its own fair share of attention.
There is no doubt that there is heavy competition in this space. Multiple stablecoins have been released in this year alone, and while most are behind PAX in terms of reach and liquidity, it cannot be argued that there aren’t several alternatives that could be attractive to investors.
It would appear that the success of stablecoins are predicated on at least two factors: marketing and features offered. Assuming that Paxos does not serve anything spectacularly different from other stablecoins, it would have to make an extensive effort to get the word to the masses that it is a solid stablecoin that doubles as a “digital dollar.” Many other stablecoins market themselves no differently, and the likes of USD Coin and the Gemini Dollar already have a lot of clout and experience in the crypto market.
Some stablecoins are also designed differently, like the DAI token in the MakerDAO ecosystem. That stablecoin ecosystem is fueled by Collateralized Debt Positions (CDPs). While this may bring its own set of issues to deal with, it cannot be argued that it is something not worth looking at.
Working in Paxos’ favor is the fact that it is well in compliance with regulation - making it attractive to future investors who are still yet to enter the market but are looking for a practical solution (stablecoins) that avoids the treacherous entry points of exchange trading (if uninformed) and ICOs/STOs.
Perhaps the concern that all stablecoins face is how they are going to operate in the future in a very crowded niche. What additional features and benefits will they offer?
Paxos has quickly risen to become one of the more popular stablecoins in the market, currently sitting at rank 31 on CoinMarketCap, and only behind Tether and USD Coin. Compliance with New York State Department of Financial Services (NYSDFS) gives PAX some credibility among investors who are concerned about the lack of regulatory uncertainty in the market and its volatility. To these investors, Paxos Standard arrives as a stablecoin that is within the law, a potential medium through which they could invest in other tokens in the market.
Of course, there’s no doubt that there are several other stablecoins available. Whether or not Paxos can capitalize on its long term goals and newer features, like the settlement system, and use that to more strongly cement its place as a stablecoin option remains to be seen. It’s still early doors for the token, and stablecoins in general, and we’re bound to see more stablecoins in the future - not to mention governments releasing central bank issued digital currencies. For the moment, however, there will be little harm for investors investing in the token, as the price remains the same and it can be used to invest in other assets.