PayPal and Cryptocurrency

5 min readAug 17, 2023


“Many people don’t know this, but the initial mission of PayPal was to create a global currency that was independent of interference by these, you know, corrupt cartels of banks and governments that were debasing their currencies.” — Luke Nosek, PayPal Founder

Satoshi invented Bitcoin specifically because the fiat system was slow, expensive, inflationary, and exploitative, and PayPal’s founding vision was to create a global currency independent of that system. There’s some irony in the fact that PayPal announced its own USD stablecoin on August 7th. A stablecoin is really just a form of demand deposit, and stablecoins make money by investing their holdings in, as PayPal says, “short-term government debt and other highly liquid assets.” Accessing those assets requires you to go through the stablecoin company, which means that while stablecoins run on cryptocurrency substrates, they are not actually cryptocurrencies; they are banks — very loosely regulated banks. As with real banks, their business model is fractional reserve banking, and the profit on those investments goes to the stablecoin company. However, unlike a real bank, there’s no federal deposit insurance which means you are the one taking the risk. Perhaps the “highly liquid assets’’ suffer a black-swan collapse, as happened with the 2008 sub-prime meltdown. Perhaps an ambitious young trader implodes the whole thing, as Nick Leeson did to Baring’s Bank in 1995. Or maybe the SEC decides to shut down the stablecoin operator for exchanging without a license, as is happening with Ripple, Binance, and several others right now. No matter the source of the problem, you own this risk, and on top of it, you continue to pay central-bank inflation in the underlying fiat currency. This is exactly what cryptocurrency is meant to protect you from. The fact that there is even a market for this kind of thing is testament to how bad the conventional transaction systems really are — in fact, so is the very existence of PayPal. In return for accepting this “heads-I-win-tails-you-lose” game, you gain some efficiency over conventional banking, and you get the stability of fiat currency.

Unsurprisingly then, the real product of a stablecoin is stability, and this is important. John Nash, Nobel-winning economist and founder of game theory, stated that “good money is stable money.” It would be nice if we could have that without resorting to fiat, but before we can get to a world where transactions can happen natively in a stable decentralized system, we have to understand what makes a currency stable.

First, stability goes hand in hand with liquidity. The larger and more diverse the economy a currency serves, the more it can absorb shocks. The Saudi Rial moves with the price of oil because oil is half the Saudi economy. The USA actually produces more oil than Saudi Arabia, but it represents only 8% of the US economy. As a result, the US dollar is much less affected by the price of oil. Cryptocurrency still serves a tiny economy on a global scale, and to date, it’s been backed by nothing more than the transaction services it provides. A small, single-product economy like this is bound to fluctuate when measured against the global economy.

More importantly though, Bitcoin (and most cryptocurrencies) have coded-in economic policies which are designed to be deflationary — steeply so. This is great for early adopters, which is why HODL (“Hold On for Dear Life”) is the watchword of the crypto world. However, the only thing worse for economic growth than inflation is deflation — this is exactly why stability is so important. When you’re HODLing, you aren’t transacting; this reduces the value of that already tiny underlying service and paralyzes the growth of the served economy. Worse, the blockchain scaling problem means that transaction costs spike whenever the transaction rate goes up, which discourages transactions the very moment there’s demand for them. Layer-2s are not a real solution — like stablecoins, they’re really just a tech version of a conventional bank.

Getting past this requires solving three problems:

1. Demand must be large and rapidly growing.

Underlying product value has to be more than just secure transactions. This one is easy: a transaction is really just a specific form of computation, and the only thing in history that has grown faster than computational capacity is the demand for it. Smart contracts already provide computation as a service, just very inefficiently.

2. Supply must meet demand.

Systems need to scale. This is impossible with conventional blockchain systems because a blockchain is an inherently serial structure. However, with parallel computing techniques and some clever proofs, we can scale without a practical limit. This also makes the computation orders of magnitude more efficient, enabling applications far more sophisticated than simple smart contracts (which in turn increases demand and drives more scaling). The service provided is no longer just transactions but computation, which since the invention of the transistor has been the fastest-growing market in human history.

3. The system has to balance supply and demand.

We need to replace fixed-cap, deflationary HODL tokenomics with a mint-burn system. This is actually the simplest problem to solve. When a user (or dApp) makes a transaction (or consumes computational services), tokens are burned. New tokens are then minted to create a new supply, and the number is minted. When demand is high, fewer tokens are created, which drives the external price higher. When demand is low, more tokens are created, which drives the external price lower.

Putting it all together, we have a network that provides a secure, resilient computation with the property of decentralized trust as an autonomous service to whoever wants to use it. It stabilizes its external price at the natural balance point of supply and demand, and it scales with demand so that this balance point is maintained no matter how large the served economy grows. We have the technology to build this system today. Let’s get building.

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