Paxos accidentally issued 300 trillion PYUSD today, surprising the community. The company quickly burned the Token and issued 300 million USD, claiming it was a user error.
This incident has highlighted a real concern in stablecoins: these protocols do not require Proof of Reserves to Token Issuance. Web3-native solutions may provide new mechanisms, but issuers may not want to implement them.
Paxos' Mistake with PYUSD
PayPal has recently expanded its PYUSD stablecoin , adding new blockchains through a series of partnerships. However, a recent incident could shake confidence in the Token and the entire sector. In an apparent error, Paxos issued 300 trillion PYUSD today, which is more than the entire global economy:
Paxos quickly burned PYUSD and issued a more reasonable $300 million about an hour later. This led commentators to suspect a “misclick,” where a user accidentally entered the wrong number of zeros. The company later indirectly confirmed these rumors, saying that no fraud had occurred.
A big problem for stablecoins
However, this incident has raised many concerns from industry observers. The stablecoin market is larger than ever , companies are aiming for unprecedented valuations , and the US government has big policy plans for the sector . Shouldn't there be more safeguards in place to prevent Paxos from accidentally issuing so many PYUSD?
Furthermore, Paxos has had a few legal issues , and PYUSD has also faced scrutiny from the community . Almost exactly a year ago, PYUSD's market Capital dropped 40% without warning, raising concerns about manipulation. These warning signs were obvious, but there were no safeguards in place to prevent this massive Token Issuance .
Specifically, the blockchain is designed to be trustless. It would be easy to code a mechanism into the blockchain to prevent Paxos from issuing PYUSD without sufficient collateral. This incident revealed that there is no such function; protocols can issue stablecoins without Proof of Reserves.
This behavior is prevalent across the stablecoin industry. While Tether has been preparing for a third-party audit for the past few months, no audit has actually taken place. Most stablecoins have not suffered the kind of blunders that Paxos and PYUSD suffered today, but we have no real evidence that other Token actually have greater protections.
In other words, signs like this are worrying for the entire industry. While Paxos quickly corrected its mistake, this should never have happened. Mistakes like this could damage TradFi’s commitment to stablecoin investing.
