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BUSD is a regulated, fiat-backed stablecoin pegged to the US dollar. For each unit, there is one US dollar in reserve. In other words, the supply of it is fixed to the US dollar in a 1:1 ratio. Holders can swap their tokens for fiat or vice versa. Paxos, the owner of the project, issues a monthly audit of the reserves of BUSD.
BUSD is a stablecoin, designed to maintain a stable market value. It allows investors and traders to hold a low volatility asset on the blockchain without having to exit the crypto space.
Introduction
If you bought or traded crypto with Binance, you may have found BUSD. This token is popular among the trading pairs that Binance offers on its exchange. In short, it acts as a digital version of the US dollar and is fixed to its value.
For newbies, it’s not always clear why traders and investors hold BUSD. However, the role of it and other stablecoins is an essential part of the crypto ecosystem.
What exactly is BUSD?
BUSD is a stablecoin founded by Binance and Paxos. Paxos uses blockchain technology to provide their Stablecoins as a Service product to external companies. In the past, they have also created a gold-backed stablecoin called PAX Gold (PAXG). The New York State Department of Financial Services regulates both PAXG and BUSD tokens.
On a technical level, it is a fiat-backed stablecoin that maintains a fixed rate in US dollars. An amount of US dollars equivalent to the total supply of it is held by Paxos, serving as its reserve in FDIC-insured US banks. When the price of the US dollar rises or falls, the price of it has the same effect. This is the most popular and traditional model of stablecoins.
BUSD offers three key attributes to transactions: flexibility, accessibility, and speed. The token is easily accessible through Binance or Paxos. You can buy them through Binance fiat gateways or exchange services, or send some in US dollars to Paxos to mint new BUSD tokens for you.
BUSD also offers flexibility in allowing crypto users to quickly turn their holdings into a stable asset without moving off the blockchain. Finally, using it, users can quickly send money globally with nominal fees.
The token exists on three different blockchains: Ethereum, Binance Smart Chain, and Binance Chain. Holders can swap their tokens between blockchains depending on their needs. This can be done on the Binance exchange (when withdrawing) or through the Binance Bridge.
How does BUSD work?
BUSD’s peg-holding mechanism is relatively simple compared to other stablecoins. Each one can be exchanged for 1 USD from the reserve fund. By sending your BUSD to Paxos, they will burn your tokens and give you fiat currency. This mechanism keeps the supply and reserve at a constant 1:1 ratio.
Whenever the price of BUSD starts to fall below $1 per 1 BUSD, arbitrageurs buy BUSD in bulk. Even the $0.98 price can give them a chance to make a profit. After purchasing a large amount of it, account analysts can then convert the BUSD tokens into fiat via the Paxos platform. The increase in demand for it naturally increases the token price up to $1, restoring the 1:1 peg.
How is BUSD regulated?
New York State regulators have implemented specific measures for Paxos, Binance, and how stablecoins work. Along with making sure the token is fully collateralized, Paxos must carefully control the creation and burning of BUSD tokens. Paxos also reserves the right to freeze accounts and delete funds if necessary due to illegal activity. All of these guidelines are subject to the New York Trust Charter and banking laws applicable to stablecoins.
Built into the token’s smart contracts is a new function that mirrors stablecoin regulation: SetLawEnforcementRole . This small piece of code allows Paxos to use the previously mentioned powers in maintaining NYDFS regulations.
Why do people use BUSD?
Based on the attributes we mentioned earlier, BUSD has many use cases for crypto investors and traders.
Avoid price fluctuations in the cryptocurrency market
Cryptocurrency ecosystems can be very volatile. Just like in the traditional financial markets, there is also a need for stable assets in cryptocurrencies, especially when the market becomes too volatile. By converting assets into fiat or securities, traditional investors can weather a volatile period. BUSD offers a similar opportunity for crypto investors and traders.
Lock in gains without needing to convert to fiat
When someone wants to get out of an investment and secure their return, BUSD provides a highly liquid way of doing so. No need to wait to transfer fiat money to your bank account from an exchange. If you decide to enter a new position or purchase another asset, you also do not need to wait to fund your account with new fiat funds.
Arbitrage trading
BUSD is a very popular stablecoin on Binance Smart Chain and many automated market makers (AMMs). These liquidity pools can provide arbitrage opportunities when prices vary between different AMMs. Holding it allows arbitrageurs to quickly move between exchanges and take advantage of the widespread adoption of BUSD across different platforms. As mentioned earlier, there can also be arbitrage opportunities through buying it and cashing out for fiat.
How is BUSD different from other stablecoins?
BUSD is different from other stablecoins on the market for a number of important reasons. First of all, BUSD is part of a portfolio of stablecoins backed by fiat. There are also crypto-backed stablecoins that use crypto assets for their reserve, such as DAI.
There are also algorithmic stablecoins without any collateral. These projects try to control the supply of stablecoins with algorithms for creating and writing tokens.
But how is BUSD different from other fiat-backed stablecoins? One key point is that Paxos issues regular checks, showing that US dollar reserves match the BUSD supply 1:1.
Accounting firm Withum completes these audits as part of BUSD’s requirements as a regulated cryptocurrency. Not every project does this, and some fiat-backed stablecoins may not have all the reserves they require.
For example, a case brought by the New York Attorney General indicates that reserves for stablecoin Tether (USDT) are not 100% backed by fiat. This discovery is in direct contrast to Tether’s previous claims.
BUSD on-chain metrics
As of June 2021, BUSD is the second largest stablecoin by market cap, standing at around $9,600,000,000. This figure includes its value in ERC-20 tokens and the BEP-2 and BEP-20 versions of the coin. Despite its popularity, there is still a significant difference between market capitalization and its biggest competitor, Tether.
As written, it also has a relatively high Volume / Market Cap of 0.4286. This number measures a coin’s 24-hour trading volume relative to the total market capitalization. For example, Bitcoin (BTC) has a Volume / Market Cap of 0.06059. In essence, this shows that BUSD is used regularly instead of just being left in the wallet as you would with a long-term investment. This principle is relevant for the use cases we mentioned before.
Where can I get BUSD?
There are several different ways to buy it. You can find several different purchase options on the BUSD landing page. One of the good options is to buy it on the secondary market. Binance has many tradable BUSD pairs as well as simple fiat gateways. You can trade another cryptocurrency or fiat currency on the exchange or use a debit or credit card to buy it.
Another method is to access the AMM and swap another coin or token for BUSD in a liquidity pool. Alternatively, you can go to the Paxos website and convert US dollars directly to BUSD. Paxos will take your fiat, add it to the reserve, and then mint new coins for you.
Closing thoughts
BUSD acts as a stable investment and a useful tool for traders and investors. Its managed state and audited reserves held in trusted financial institutions give this coin a high degree of trust. For anyone who regularly uses Binance Smart Chain or Binance Chain, it is a solid stable choice to use alongside other projects.
