Binance USD (BUSD), the stablecoin of Binance’s sprawling ecosystem

What is Binance USD (BUSD)?

Binance USD (BUSD) is a stablecoin born from a partnership of the top-rated company Binance with Paxos Trust Company. Binance is no longer presented, and if you’ve ever used this exchange, you’ve probably already seen the BUSD on it. But what about Paxos?

It is a platform providing cryptocurrency-related solutions to large companies and financial institutions such as Credit Suisse, PayPal, Revolut or Société Générale. Mainly specialized in stablecoins, Paxos is therefore at the origin of the BUSD, but also other stablecoins such as the Pax Dollar (USDP) and the PAX Gold (PAXG).

Binance USD is a project born in September 2019, and Binance has chosen to join forces with a partner of choice like Paxos for its expertise in the field. At the announcement, Changpeng Zhao (CZ), CEO of Binance, said of the partnership:

Paxos has a crucial role in this project since it is the custodian and issuer of all BUSD tokens. Indeed, the company guarantees the value of the BUSD in dollars: it holds several dollars equal to the total supply of BUSD tokens.

It is one of the only regulated stablecoins in the United States. BUSD is approved by the New York State Department of Financial Services (NYDFS) along with others, such as the Gemini Dollar (GUSD) or the Pax Dollar (USDP). It means authorized financial institutions in the New York area can own and list the BUSD without prior approval from the NYDFS.

Binance USD is therefore considered a stable and reliable financial product. Indeed, NYDFS officials analyze how stablecoin works and how it is supported and guaranteed. It is an asset for the long-term stability of the project since New York’s economic and regulatory environment is one of the strictest in the world.

Since a centralized stablecoin is highly vulnerable to financial regulations, Paxos and Binance have achieved a significant accomplishment for Binance USD with this.

Finally, the BUSD stablecoin evolves on several blockchains and, therefore, in the form of several tokens, but the two main ones are as follows:

  • In ERC-20 on the Ethereum blockchain. These are the tokens issued by Paxos;
  • In BEP-20 on the BNB Chain. These tokens are created by Binance, having the equivalent of ERC-20 BUSD in their reserve. It is the “Binance Peg“. These BEP-20 BUSD tokens do not have NYDFS approval.

BUSD users can swap their tokens between blockchains according to their needs directly from Binance. However, remember that only ERC-20 BUSD tokens are backed by Paxos.

READ MORE: Binance integrates the Ethereum layer-2 protocol “Arbitrum” as the scaling race heats up.

What is the BUSD used for?

With its strengths and the support of Binance and Paxos, Binance USD has climbed into the top 3 of the most valuable stablecoins on the market ($ 18 billion in April 2022). But what exactly is it for?

BUSD has the same utility as most stablecoins, namely, to trade with other cryptocurrencies while minimizing the volatility risk.

Indeed, since cryptocurrencies are highly volatile assets by nature, investors can regularly be confronted with a significant fluctuation in the value of their portfolio. Using a stablecoin such as the BUSD makes it possible to hedge in market turbulence in particular.

But not only, since it logically allows you to send funds from anywhere and cheaply without a bank account.

How does Binance USD work?

We now know that the BUSD is a stablecoin 100% guaranteed by the dollar reserves of the Paxos company.

The ideal supply of BUSD is equal to the dollar reserve with a ratio of 1 to 1. Indeed, each BUSD token can be exchanged for 1 dollar on the Binance exchange and with Paxos.

Concretely, by sending BUSDs to Paxos, the latter will burn these tokens and return the equivalent in dollars taken from the reserve. Conversely, it is possible to buy BUSDs directly from Paxos by sending them dollars. Thus, new BUSD tokens will be created, and the dollars received will be kept in reserve.

This mechanism ensures that the circulating supply of BUSD and the dollar reserve are always equivalent.

In practice, this is a little more complicated since Paxos does not only hold dollars in its reserves.

The reserves consist of dollars in US banks insured by the Federal Deposit Insurance Corporation (FDIC).

In addition, these reserves also consist of US Treasury bills, most of which have a short-term maturity of less than 3 months. These low-maturity treasury bills are very liquid and are held in reserve.

Arbitrage is fundamental to most stablecoins, and Binance USD is no exception. For example, if the price of the BUSD drops slightly to $0.99 due to momentarily high selling pressure, many traders will arbitrage by buying a large number of BUSD tokens.

They will then be able to send these BUSDs to the Paxos platform to receive $ 1 per token in return, earning $ 0.01 in profit per token.

These purchases increase the demand for the token, which will allow the BUSD price to return to parity with the dollar. This financial incentive is a logical and risk-free mechanism, which naturally enhances the stability of the BUSD stablecoin. Provided, of course, that investors have confidence in Paxos to hold its reserves properly.

READ MORE: Why could Binance Coin’s (BNB) price rise in the coming hours?

opinion on Binance USD

Binance USD (BUSD) is a very solid centralized stablecoin carried by big names in the cryptocurrency industry, namely Binance and Paxos. It is similar in its operation to Tether (USDT) and USD Coin (USDC) since they are centralized stablecoins backed by the dollar and very different from decentralized stablecoins like Dai (DAI) or TerraUSD (UST).

The BUSD stands out from the rest of Paxos’ know-how in creating a stablecoin and understanding the regulatory environment. It, combined with the scale of exposure brought by the Binance platform and its BNB Chain, has made Binance USD one of the industry’s most reliable and stable major stablecoins in a short time.

In particular, Paxos is very transparent and publishes a monthly report on its dollar reserves to guarantee BUSD. It gives investors more confidence, especially since the NYFDS approves BUSD in the United States, as we have seen.

However, we only talk about BUSD tokens evolving on the Ethereum blockchain. BUSD tokens evolving on other blockchains are not the responsibility of Paxos, nor does the New York financial regulator guarantee them.

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