Request for Commentary: Swapping JLP Stable Constituents to PYUSD for 4% Yield

Jupiter Products Perpetuals
,
1

Request for Commentary: Swapping JLP Stable Constituents to PYUSD for 4% Yield

About

PayPal is a globally recognized leader in the payments and remittance industry.

Launched in August 2023, pyUSD is a partnership between PayPal and the Paxos Trust Company. Paxos is a New York State Department of Financial Services regulated Trust that acts as a qualified custodian of fully bankruptcy remote and segregated funds. Paxos issued coins such as pyUSD are always redeemable 1:1 and its reserves are held in cash and US Treasuries.

PYUSD offers best in class regulatory status, CEX support, and on-chain liquidity. PYUSDs market cap has recently surpassed $900M and while it is built upon the token22 standard, which provides superior compliance control to its issuer, there are no plans to enable transfer fees, you can read more about PYUSDs operational considerations here.

Summary

Trident, a service provider of Paxos, proposes reallocating USDT (and USDC if the appetite exists) to PYUSD in the Jupiter Liquidity Pool. PYUSD is the fastest growing stablecoin in the market and is affiliated with a well known Fortune 500 company.

If Jupiter moves forwards with this proposal the protocol will earn 4% (USTFFR - 125 BPS) in perpetuity on all PYUSD JLP balances up to $500M, as well as be eligible for two $100,000 milestone rewards upon launch, and upon reaching a balance of PYUSD greater than $50M.

The fee paid will be floating based upon the US Total Federal Funds Rate and is available in perpetuity from the initiation of this proposal.

The current stable TVLs of the JLP stand as follows:

  • USDC: 26.13% of a 26% target; ~$180M in assets held
  • USDT: 9.17% of a 9% target; ~$63M in assets held

Under current conditions, the potential yearly earnings of the protocol are as follows, and in perpetuity:

  • If all USDT swapped to PYUSD: $2.52M
  • If PYUSD target = 17%, ~$111M: $4.45M
  • If PYUSD replaces entire stable allocation, ~$243M: $9.72M

These two potential paths, at current Federal Funds Rates, would generate an additional .39%, .68%, and 1.49% respectively for JLP holders in perpetuity.

Overall we believe that this proposal presents a strong path towards reducing reliance upon USDC and posit that to be a net positive to both the protocol and the space as stablecoin issuers have to compete to offer the best terms to their users.

Proposal Details

  1. Jupiter shares the extra revenue generated with JLP holders
  2. Risk: PYUSD is the third largest, and most regulatory friendly, stablecoin on Solana with deep liquidity available both on-chain and through Paxos (after onboarding). The existing infrastructure allows for reliable capital management, and upcoming features will improve its crosschain infrastructure.
  3. Implementation: PYUSD pools are the largest stable pools on Solana, given this and the ability of Paxos to support the Protocol after onboarding, Trident recommends a phased approach selling equal amounts weekly over the course of two months (in the case of USDT replacement) or three months (with the addition of partial USDC replacement)
  4. Fee and Term: The fee will be calculated as the USTFFR minus 125 Basis Points and will be available in perpetuity or until termination available bilaterally.

Next Steps

We welcome the opportunity to field questions and address concerns and look forward to participating in a discussion with all Jupiter Stakeholders. If the proposal is attractive to the community we will undertake work with the Core Jupiter Contributors to implement the changes mention herein.

Disclaimer

Trident is contracted with Paxos to manage the DeFi adoption of its products. While we believe the contents of this proposal to be valid and actionable we encourage all stakeholders to do their due diligence and are happy to provide the supporting information as if its need becomes apparent.

6 Likes
2

I appreciate the opportunity to discuss this proposal for allocating a significant portion of JLP to PYUSD. While I recognize the potential benefits, I have several concerns that I believe warrant careful consideration. I’m sharing these thoughts to contribute to a thorough evaluation of the proposal and invite further discussion from all stakeholders.

Risk and Regulatory Considerations

A primary concern is the concentration risk that this proposal introduces. Shifting a large portion of assets from established stablecoins like USDT and USDC to PYUSD could expose JLP to significant risk if PYUSD faces unforeseen challenges. The regulatory landscape for stablecoins, particularly in the U.S., is still evolving. While PYUSD is positioned as regulatory-friendly, new regulations or enforcement actions could impact it in ways we cannot yet anticipate.

Moreover, PYUSD’s current market cap and liquidity lag behind more established stablecoins. This could potentially lead to liquidity issues, making large scale trades or conversions more difficult and possibly resulting in fund lock ups or slippage. These factors could significantly impact the JLP’s operational flexibility and risk profile.

Trust and Reputation

While PayPal is a well known brand, both Paxos and PYUSD are relatively new to the stablecoin market. This newness raises questions about their long term commitment and reliability in maintaining PYUSD’s stability and usability. The proposal’s origin from Trident, which has a contractual relationship with Paxos, also warrants scrutiny. We should carefully examine whether the proposed 4% yield truly represents the best available option for the JLP, or if it might be influenced by this existing relationship.

Strategic Implications

The proposed reallocation would significantly reduce the diversification of our stablecoin holdings. Diversification is a fundamental risk management strategy, and concentrating heavily in PYUSD could increase our vulnerability to market or regulatory issues specific to this stablecoin. Additionally, while the phased approach to transition is prudent, it still carries execution risks. Market conditions could shift during the transition period, potentially resulting in losses or missed opportunities.

It’s crucial that we critically assess whether the incremental yield offered by this proposal justifies the associated risks and strategic shifts. The potential revenue increase highlighted in the proposal may not fully account for the various risks and costs tied to such a significant change in asset allocation.

Market Considerations and Future Opportunities

As a relatively new entrant, PYUSD’s market sentiment could be volatile. Any issues arising with PayPal or Paxos could negatively impact PYUSD’s value or usability, a risk that becomes more significant with a larger allocation. Furthermore, by focusing heavily on PYUSD, we might be limiting our ability to capitalize on future opportunities in other stablecoins or yield generating assets that could offer better risk adjusted returns.

Conclusion

While the proposal offers potential benefits, I believe these concerns merit serious consideration. I encourage all stakeholders to thoroughly evaluate these points, whether they agree with my perspective or not. Our collective goal should be to make a decision that best serves the long term interests of the Jupiter Liquidity Pool and all its participants.

I welcome further discussion and am open to hearing different viewpoints or additional information that might address these concerns. By engaging in this dialogue, we can work towards a solution that balances potential rewards with prudent risk management.

4 Likes
3

You have coherently addressed a lot of things and more that played through my mind as I read the request for commentary on this topic. I strongly agree with all your arguments👍🏿

3 Likes
4

Hey we appreciate the time and thought you’ve put in to ask questions here, let’s see if we can address each of your concerns:

This we would argue is true for either USDC or PYUSD, given PYUSDs approach we believe it to be the more regulatory friendly stable, and as such in the case where these risks present themselves we’d argue that USDC would be more risky.

This is pretty easily addressed through Jupiter onboarding with Paxos, this will enable 1:1 redemptions as well as swaps for other stables and the ability for mainnet and solana minting/burning. Paxos also has market makers that are ensuring onchain liquidity health.

Influence is everywhere, we’re offering a higher toplline and better terms than the comparable proposal by gauntlet regarding USDC, the same about relationships could be said with regards to circle and gauntlet. As mentioned in the proposal we at Trident are working towards a more competitive landscape which we believe will bring better product offerings to users. If gauntlet and circle are able to match or exceed the terms we can offer we would encourage the community to go with the best deal.

The baseline proposal to replace USDT doesn’t technically decrease diversification, rather it concentrates risk into regulated stables. If the community wanted to instead add a third stable and reduce the dependence on USDC we would be very supportive.

This risk is present with any allocation. Paxos has a track record, through the USDC depeg during FTX USDP was the only way that MakerDAO was able to maintain DAIs peg. PYUSD has a steadily growing history of both providing enough depth and staying on peg.

Additionally, this proposal offers mutual termination so if a better opportunity comes along for JLP allocation there is nothing preventing that change, additionally the milestone bonuses should cover any dev costs so there is reduced risk on that front.

Hopefully this all makes sense!
Best,

2 Likes
5

I genuinely appreciate your detailed response and the effort to clarify several points. Your feedback has provided valuable insights, and I’d like to continue this constructive dialogue.

I’m glad you addressed the regulatory aspect of PYUSD. While I agree that regulatory risks apply to all stablecoins, including USDC, I’m still curious about how PYUSD’s approach might offer additional protection. Could you elaborate on specific measures or structures that make PYUSD potentially more resilient to regulatory challenges? This information could help the Jupiter community better understand the comparative advantages.

Regarding liquidity concerns, your point about Jupiter potentially onboarding with Paxos is reassuring. The prospect of 1:1 redemptions and direct minting/burning capabilities could indeed mitigate many of the liquidity risks I initially raised. I’d be interested in learning more about the timeline for this onboarding process and any potential (expected or otherwise) challenges we might face in implementing it.

I appreciate your candor about the influence of relationships in these proposals. You make a fair point that such influences exist across the board. The competitive landscape you’re working towards sounds promising. In light of this, do you foresee any potential for even more favorable terms in the future as competition increases? It would be helpful to understand how flexible this arrangement might be if market conditions change.

Your suggestion about potentially adding a third stable to reduce dependence on USDC is intriguing. This approach to diversification hadn’t occurred to me initially, and it’s definitely worth considering. How would this three stable strategy work in practice, and what would be the potential benefits and drawbacks compared to the current situation?

Lastly, I appreciate the information about PYUSD’s growing track record and Paxos’ performance during past market stresses. The mutual termination clause you mentioned does provide some reassurance about our ability to adapt to future opportunities. Could you provide more details about the milestone bonuses and how they’re structured to cover potential dev costs?

Thank you for engaging in this discussion. Your responses have certainly given me a lot to think about and have clarified several of my initial concerns. I look forward to continuing this dialogue and learning more as we work towards the best solution for the JLP.

2 Likes
6

Most of it already said before me but additional comments from my side would be with regards to the risks that can be encountered, i.e. PYUSD is growing rapidly but still is relatively new when compared to USDT and USDC. The proposal should take into account the market adoption and liquidity of PYUSD. The stability of this market is yet to evaluated based on the future data. Changing the behavior and accustomed way of customers with regards to transactions can be a challenge, especially when most of the systems are established based upon the stablecoins we currently use. Apart from this additional operational costs can be incurred if the standards are to be changed when incorporating it to the existing JLP infrastructure. A pilot programme can be opted to test the market response.

1 Like
7

Paxos is an NYDFS regulated trust that sits as a separate entity from Paypal and solely manages the assets backing its assets, whereas a player like Circle while still NYDFS regulated operates as a fintech with broader operations outside of just the management of USDC.

Should be no barriers to integration, time to complete the onboarding is a few days after which things can be working pretty quickly on both this proposal as well as a Paxos redemption facility.

We’re offering the best terms we can, if anyone can offer better then yes. The terms are set based on the Fed Funds Rate.

Same as proposed, a transition selling some usdc for pyusd.

Milestone on Launch. Milestone at $50M TVL. $100K Fixed fee on each, first should more than cover dev costs.

Cheers,

2 Likes
8

Hey @Trident_M

I just want to hit on two final points - take a look, and let me know your thoughts (sorry if any of this was harsh, I’m trying to keep it as constructive as possible).

  1. The Three Stable Strategy.
    I strongly believe your original proposal would be more appealing if it explicitly outlined a three stable strategy from the start. Instead of simply transitioning from USDC/USDT to PYUSD, consider a balanced approach that maintains significant positions in USDC, USDT, and PYUSD. This would address diversification concerns while still leveraging PYUSD’s benefits. I’d personally enjoy seeing a revised proposal to include specific allocation percentages and the rationale behind this strategy.

  2. Fiat-Based Rates Concern.
    While I understand the current terms are based on the Federal Funding Rate, I have reservations about this approach. Many crypto investors, myself included, are drawn to the space for its potential independence from traditional financial systems and government monetary policies. I suggest exploring alternative benchmarking methods that align more closely with crypto market dynamics (even if the rates you offer remain the same, if the reason behind it is more related to crypto metrics it brings a stronger sentiment IMO). This could make the proposal more attractive to those seeking crypto native solutions.

Anyways, I’ve enjoyed the proposal and think there are some very positive notes to it. I appreciate your openness to discussion and the detailed information you’ve provided throughout this process. Your willingness to engage in this dialogue demonstrates a commitment to finding the best solution for all the Jupiter community. I look forward to seeing how these ideas might be incorporated into future iterations of the proposal or similar initiatives.

2 Likes
9

It would also be good to understand what are Trident/Paypal’s objectives and key metrics for this proposal. How a “good partnership” with Jupiter would look like.

1 Like
10

Open to this but would love others opinions as well, if a three stable approach is best for Jupiter then we support it and I can write an update proposal.

This is tough as it introduces pricing risk, generally I’m pretty optimistic that we could come up with a product like this in the future, but we’d want to bring in as many stakeholders as possible and the effort would be a much bigger lift than this proposals scope.

All reasonable points, appreciate you tapping in and providing your thoughts!

Our (Trident’s) objective is to grow TVL/AUC of stables in general, as PYUSD support is rolled out to more platforms we still see Solana as a core component, the goal with PYUSD is for it to become THE stable coin for payments. In the coming months you’ll see the rollout of improved features and support especially with regards to merchants.

In terms of what a good partnership looks like we consider this the jumping off point, our aim is not only the above with regards to metrics for PYUSD, but also to support the protocols who are launching integrations.

In an ideal world this would be just the start of further work between Jupiter and Trident!

1 Like