It is possible for it say pending on the payer's side, it has happened to me several times. (Like someone else mentioned, it's easily resolved by canceling the invoice and re-sending.) It's possible he genuinely believe he paid it and thought paypal was just doing it's thing and it would clear in a few days. Granted he could have checked it more thoroughly/he was being careless, but like... we're all humans who make mistakes
Reading through this, I feel like this person made a mistake then got really mad when you called them a liar and acted a bit irrationally. It would have been better for them to take a day to collect their thoughts/calm down then come back to resolve the issue with you in private instead of blocking you. Even if the comm was still canceled, the whole thing could have been resolved a bit more nicely if you had been able to talk it out
With that being said, approaching someone with "you're a liar" is... not great communication. It's insulting and is very likely to make the other party feel attacked/be upset with you. It would have been nicer to say something along the lines of "i called paypal and they said there is no pending payment, could you re-check the invoice?"
it's possible he could have given you some weird excuse/this could have ended the same way, but in your last communication he acknowledges he thought he sent payment but it didn't and he made a mistake. It's just as possible he could have went "oh i see i made a mistake, i'm sorry" and then paid the invoice immediately and you wouldn't ended a relationship with a customer/friend over something that was an accident. What's done is done and there is no way of knowing at this point, but just thought I'd toss it out there in case something like this ever happens to you again with payments on paypal. It doesnt excuse his temper/him blocking you, but it's a good practice to approach customers/friends respectfully with issues
Also I do agree you have the right to change the hair and sell the design; while I understand from his perspective this design feels very personal/tied to his character, from an outsiders view I've seen stuff like this before. I don't mean this in a negative way, just that I don't think the design is so unique it could only be tied to his character; i think it can be re-purposed so you can get some money back on your time.
I'm not sure how much you valued your friendship with this person, but if you would be interested in saving it/ending this on good terms, I'd give them a few days to calm down. Once their initial anger has passed they may contact you to work it out/see if they can negotiate having you finish this piece for them. They mentioned paying extra to compensate you for your trouble and they may be willing to do this? This situation seems mostly caused by miscommunication/emotions so I feel like if you both gave yourself a few days then tried to talk, you might be able to part on better terms. In my general experience, this is kind of the better path to take because it gives you a real resolution vs forever lingering bad feelings (him feeling you disrespected him by calling him a liar and that you're taking the design of his oc, while you feeling like he was dishonest and worrying he will try to use your art without having paid for it)