A stable cryptocurrency is a cryptocurrency whose price is pegged to another cryptocurrency, to a fiat currency or to an exchange-traded product (such as precious metals or industrial metals).
While traditional cryptocurrencies guarantee effective decentralization and complete independence from any monetary authority , these assets experience high volatility . Stablecoins present themselves as a response to this volatility. Because the currency is linked to a fairly stable asset, such as the US dollar or the euro, its value changes little over time. In order to further stabilize its price, the stablecoin can be based on a basket of currencies or exchange-traded products .
Stable cryptocurrencies therefore allow their users to benefit from the advantages offered by traditional cryptocurrencies, such as immutability and anonymity, without their main drawback, which is their high volatility .
The most developed stablecoins today trade primarily in the United States .
What is Binance USD (BUSD)?
Binance USD (BUSD) is a stablecoin born from a partnership of the very popular Binance company with Paxos Trust Company . We no longer present Binance , and if you have already used this exchange, you have probably already seen the BUSD on it. But what about Paxos?
It is a platform providing solutions related to cryptocurrencies to large companies and financial institutions such as Credit Suisse, PayPal, Revolut or Société Générale. Particularly specialized in stablecoins, Paxos is therefore at the origin of BUSD, but also other stablecoins such as Pax Dollar (USDP) and 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. During the announcement, Changpeng Zhao (CZ) , the CEO of Binance, said of this partnership:
“ Paxos is the leader in the field of digital trusts and we are delighted to work with them to develop our native stablecoin […] . We hope to bring more financial services to our blockchain ecosystem through the issuance of BUSD, including more use cases and utility through the potential of stable digital assets. »
Binance USD (BUSD) is a stablecoin that tracks the price of the US dollar (USD). It is centralized and the value of its tokens is guaranteed by dollars . More concretely, this means that for 1 BUSD token issued, there is 1 US dollar in the reserves of the issuing company. BUSD tokens are the debts and dollars are the assets.
Paxos has a crucial role in this project as it is the custodian and issuer of all BUSD tokens . Indeed, it is the company that guarantees the value of BUSD in dollars: it holds a quantity of dollars equal to the total supply of BUSD tokens.
It is one of the only regulated stablecoins in the United States. The BUSD is also 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). This means that authorized financial institutions in the New York area can own and list BUSD without prior approval from NYDFS .
Binance USD is therefore considered a stable and reliable financial product . Indeed, NYDFS officials analyze how the stablecoin works and how it is backed and secured. This is an asset for the long-term stability of the project since the financial regulatory environment in New York is one of the strictest in the world .
A centralized stablecoin being very vulnerable to financial regulations , Paxos and Binance have achieved with this a major achievement for Binance USD.
Finally, the stablecoin BUSD evolves on two blockchains and therefore in the form of 2 tokens:
- 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 by having the equivalent in BUSD ERC-20 in their reserve. These BUSD BEP-20 tokens do not have NYDFS approval .
BUSD users can swap their tokens between the two blockchains according to their needs, directly from Binance.
What is BUSD used for?
Building on its strengths and the support of Binance and Paxos, Binance USD has managed to climb into the top 3 of the most valuable stablecoins on the market ($18 billion in April 2022). But what exactly is it for?
BUSD serves the same purpose as most stablecoins, which is to transact with other cryptocurrencies while minimizing the risk of volatility .
Indeed, cryptocurrencies being very volatile assets by nature, investors can regularly be confronted with a significant fluctuation in the value of their portfolio. The use of a stablecoin like the BUSD makes it possible to hedge in times of market turbulence in particular.
But not only, since it logically allows you to send funds from anywhere and at low cost, without a bank account.
BUSD on the Binance platform
Naturally, the Binance exchange offers around 300 BUSD cryptocurrency pairs in spot trading at the time of writing (April 2022), as well as BUSD perpetual contracts on Binance Futures .
Figure 1: Overview of BUSD pairs on the Binance exchange
This is a great asset that gives great exposure to BUSD since Binance is by far the most popular centralized exchange in the industry, whether in terms of daily transaction volume, liquidity or even the number of users.
That’s not all, since BUSD is also an entry point to decentralized finance (DeFi). It is possible to use attractive DeFi services to obtain very interesting returns directly from Binance :
Figure 2: Overview of features offered by Binance in the “Earn Cryptos” tab
- Staking then Staking DeFi : offers the possibility of staking its BUSD tokens via the Venus lending platform for returns of up to around 13% per year at the time of writing these lines;
- Launchpad : sometimes offers the possibility of staking its BUSD tokens for a limited period (usually 30 days) to participate in a Binance Initial Exchange Offering;
- Liquidity Farming : Provides BUSD tokens in a variety of liquidity pools for returns of up to nearly 50%.
It is also possible to generate returns with BUSD tokens by directly using other lending platforms such as Curve or Beefy Finance.
Finally, Binance also has a non-fungible token (NFT) marketplace, where listed NFTs can be quoted in BUSD .
How does Binance USD work?
We now know that BUSD is a stablecoin that is 100% backed by Paxos corporate dollar reserves .
The circulating 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, but also with Paxos.
Concretely, by sending BUSD to Paxos, the latter will burn these tokens and send back the equivalent in dollars taken from the reserve. Conversely, it is possible to buy BUSD directly from Paxos by sending them dollars. Thus, new BUSD tokens will be created and the dollars received will be kept in the reserve.
This mechanism ensures that the circulating supply of BUSD and the dollar reserve are always equal .
In practice, this is a little more complicated since Paxos does not only hold dollars in its reserves.
Reserves consist of dollars located in US banks insured by the Federal Deposit Insurance Corporation (FDIC).
In addition, these reserves are also made up of US Treasury bonds , most of which have a short-term maturity, i.e. less than 3 months. This type of low-maturity treasury bills is very liquid and it is for this reason that they are held in reserve.
Arbitrage is also a fundamental aspect of most stablecoins, and Binance USD is no exception. For example, if the price of 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 BUSD to the Paxos platform to receive 1 dollar per token in return, earning 0.01 dollar profit per token.
These purchases increase demand for the token, which will allow the price of the BUSD to return to parity with the dollar. This financial incentive is a logical and risk-free mechanism , which naturally reinforces the stability of the BUSD stablecoin. Provided, of course, that investors trust Paxos to properly hold its reserves.
Exemplary transparency of Paxos
To demonstrate transparency and to comply with financial regulations, Paxos turned to Withum . The latter is a nationally recognized American consulting and accounting firm that provides services to businesses and individuals.
Withum therefore independently verifies that the entire supply of BUSD tokens corresponds to the dollar reserves on the accounts held and managed by Paxos.
Figure 3: Extract from the certificate of Paxos accounts as of February 28, 2022
At the end of each month, this firm publishes certificates of these accounts using the standards established by the American Institute of Certified Public Accountants (AICPA). These certificates are publicly available on the Paxos website .
It should be noted, however, that the exact breakdown of the assets by which the BUSD is guaranteed is not detailed in this report.
How to buy BUSD tokens?
Explanations for buying BUSD on Binance
- Register on Binance;
- You will receive an email and need to click on a link to verify your account;
- Deposit funds on the platform;
- Click on the Market menu and search for the BUSD/USDT pair ;
- All you have to do is buy BUSD for the amount of your choice;
- Congratulations 🎉 You are now in possession of BUSD tokens!
Our opinion on Binance USD
Binance USD (BUSD) is a very strong centralized stablecoin backed by big names in the cryptocurrency industry, namely Binance and Paxos. It is similar in operation to Tether (USDT) and USD Coin (USDC) since they are centralized dollar-backed stablecoins, and very different from decentralized stablecoins like Dai (DAI) or TerraUSD (UST).
BUSD stands out from the rest with Paxos’ expertise in creating a stablecoin and its understanding of the regulatory environment. This, combined with the sheer scale of exposure brought by the Binance platform and its BNB Chain, has made Binance USD one of the most reliable and stable major stablecoins in the industry in a very short time.
Paxos is notably very transparent and publishes a monthly report on its dollar reserves to guarantee the BUSD. This gives investors more confidence , especially since BUSD is NYFDS approved in the US as we have seen.
Given the growth of Binance’s ecosystem and the strength of its stablecoin, it’s clear that BUSD has a bright future ahead of it .