Author: JAE

In the early morning hours of October 16th, the crypto market was rocked by a dramatic incident when stablecoin issuer Paxos abruptly minted and destroyed 300 trillion PayPal USD (PYUSD), leaving the market in a state of confusion. This "blunder" was more than just a simple human error; it also vividly exposed the inherent vulnerabilities of centralized stablecoins in terms of technical governance and internal controls.

Paxos accidentally issues 3 million PYUSD tokens in the biggest "blunder" in history

The incident began with an internal operation of Paxos. According to its transaction records on Etherscan, Paxos was originally preparing to transfer 300 million PYUSD between different wallets, but accidentally destroyed it.

300 million PYUSD represents over 11% of the total circulating supply, a significant amount. However, because destruction essentially reduces circulating supply, it only results in a short-term contraction in supply and has no impact on the anchoring mechanism. However, this accidental destruction was only the beginning of a catastrophic error that would follow.

While Paxos was attempting to correct its error, a "fat finger" error (a parameter input error typically manifested by extra zeros) occurred, leading to the accidental minting of 300 trillion PYUSD. According to CoinMarketCap, PYUSD's current market capitalization is only approximately $2.6 billion, while the amount of erroneous minting represents 113,250 times the circulating supply, a stark contrast. If priced per dollar, the total amount of erroneous PYUSD minting is equivalent to more than twice global GDP, far exceeding US M1/M2 and the entire crypto market capitalization. This means that even if Paxos maintained sufficient reserves, facing a 300 trillion supply would instantly reduce its collateralization ratio to zero, rendering users' PYUSD worthless, leading to a collapse in market confidence and a chain reaction.

Furthermore, if this massive amount of PYUSD were used for on-chain transactions and captured and exploited by arbitrage bots or market makers, even for just a few seconds, it would severely unbalance the liquidity pool on the DEX and cause a rapid decoupling of the PYUSD price. In the AMM model, this sudden surge in supply would cause the price of PYUSD to plummet relative to other assets, leading to a significant decoupling. Aave, a leading DeFi lending protocol, immediately froze the PYUSD market after the issue occurred to prevent potential risks. Chaos Labs founder Omer Goldberg also posted on the X platform that due to the unexpectedly high minting and burning of PYUSD, related trading would be temporarily frozen.

To avoid catastrophic consequences, Paxos was forced to take another destruction action, removing the accidentally minted 300 trillion PYUSD supply from its wallets to prevent the potential devastation to the ecosystem caused by its minting error. After the incident subsided, Aave also unfroze the PYUSD market.

Although the Paxos generation issue was merely an internal technical failure, its emergency intervention process also reflects the paradox of centralized stablecoins: even if the issuer has sufficient asset reserves and absolute authority to mint/destroy coins, if there are flaws in technical governance and internal controls, its "God-level authority" over supply may lead to a systemic crisis.

Internal risks have become the biggest single point of risk. How should stablecoin issuers optimize?

Paxos has always used its regulatory and compliance status as a selling point, viewing this as a competitive moat against other stablecoin issuers, particularly Tether, which has less regulatory transparency. However, this incident has raised questions in the market: how could a regulated entity, claiming to be highly compliant, allow such a simple parameter input error to pass through its numerous security checks?

This technical issue has also made the market realize that while fiat currency reserves and regular audits are important, they cannot eliminate technical governance and internal control risks. This "blunder" may also erode Paxos's regulatory advantages, making its technical risk profile somewhat similar to that of its less regulated competitors.

Coincidentally, Tether also accidentally minted and destroyed approximately $5 billion in USDT in 2019. However, the sheer scale of Paxos's error has sparked wider concerns. This further demonstrates that fiat-backed stablecoins are not invulnerable, potentially raising two additional technical governance and internal control issues.

During the error correction process, Paxos's "God's power" saved PYUSD from an instant collapse. To maintain a 1:1 peg, fiat-backed stablecoins must have absolute authority to mint and burn coins. However, this necessary evil also presents the greatest single point of risk. To address the associated operational risks, stablecoin issuers should establish stricter internal control processes. However, this also means higher operating costs and a higher degree of centralization.

Stablecoin issuers face a dilemma: how to maintain rapid intervention (centralization) while minimizing the risk of human error (decentralization/automated processes)? This challenge will become a key issue in the future of stablecoin governance.

In response to this "oolong incident" caused by a parameter input error, stablecoin issuers such as Paxos must implement fundamental reinforcement at the technical governance and internal control levels: 1) Outlier detection and time locks should be set up at the technical level, and an outlier detection mechanism must be embedded at the smart contract level. For example, any single minting or destruction transaction that exceeds a certain threshold of the total reserve (such as 10%) must initiate an hourly cooling-off period, or be automatically terminated by the system and wait for manual approval; 2) Multi-signatures should be mandatory for internal controls, and minting/destruction operations must adopt a strict multi-signature mechanism, requiring at least three executives with different functional backgrounds (such as technology, finance, and compliance) to jointly approve and sign to ensure the verification of the input parameters.

Although Paxos's "fat finger" did not cause a market collapse, it revealed systemic risks and sounded a wake-up call for all issuers: the management of centralized stablecoins must go beyond simple reserve transparency to include technical governance and internal controls to ensure that they will no longer arouse market doubts due to low-level parameter input errors.

数据：PayPal稳定币PYUSD总发行量已超3亿枚

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