What is Binance USD (BUSD)?
As you already know, Binance USD is pegged 1:1 with the US dollar, and new BUSD is issued by Binance, a digital asset trading company.
Interestingly, at the time when Binance launched their new stablecoin, the company had already developed its own blockchain, called the Binance Smart Chain, with its own native token, Binance Coin (BNB).
While the BUSD can obviously operate on the Binance Smart Chain as it complies with the BEP-2 standard, it was built on Ethereum, thus classifying it as an ERC-20 token. What does this even mean? We’ll show you why this is good news for the holders in upcoming sections.
Of course, Binance wasn’t the first to issue a stablecoin. Binance USD first came into circulation in September 2019, which is almost five years after the first stablecoin was issued, Tether (USDT). Even if you can say that 1 BUSD equals to 1 USDT, Binance USD can be considered to be a third-generation stablecoin.
We say this based on the story behind Binance USD, from its regulatory compliance to security.
History of Binance USD (BUSD)
Launched in September 2019, Binance USD (BUSD) is a fiat-collateralized stablecoin launched in collaboration between Binance and Paxos. BUSD is the frist stablecoin launched as part of Binance's Venus project. It was also revealed at the time of launched that NYDFS had approved the new offering, which Binance is launched in partnership with the Paxos.
BUSD is issued by Paxos, a New York-regulated financial institution. Led by CEO and Co-Founder Charles Cascarilla, the Paxos team consists of individuals from various backgrounds and experiences ranging from Wall Street to Silicon Valley.
BUSD was built to improve the larger financial ecosystem by creating a frictionless global network where digital assets can be mobilized with significantly increased speed, flexibility, and accessibility.
BUSD Use Case.
Based on the price stability, Stablecoin plays an important role in transactions, payments and settlement, and Decentralised Finance (DeFi).
Here are some of the BUSD use case:
- Transfer your digital dollars (BUSD) anywhere in minutes, with low cost and on the blockchain.
- Trade BUSD on different exchanges and DEX.
- Deposit BUSD to earn an interest rate.
- Pay BUSD as payment for goods and services.
- Use BUSD as collateral and loan asset.
- Use BUSD as cross collateral in Futures.
- Store BUSD on an exchange or in a wallet.
How does BUSD work?
The mechanism for keeping BUSD’s peg is relatively simple compared to other types of stablecoin. Each BUSD is exchangeable for 1 USD from the reserves. By sending your BUSD to Paxos, they will burn your tokens and provide you with the fiat currency. This mechanism keeps the supply and reserves at a constant 1:1 ratio.
Whenever the price of BUSD begins to move lower than $1 per 1 BUSD, arbitrager traders will purchase BUSD in large quantities. Even a price of $0.98 could provide them an opportunity to make a profit. After purchasing large amounts of BUSD, the arbitragers can then convert the BUSD tokens into fiat through the Paxos platform. An increase in demand for BUSD naturally raises the token price back up to $1, restoring the 1:1 peg.
Why was Binance USD invented?
BUSD may have been invented to serve the corporate interest of Binance, rather than as a reaction to the problems that are involved with preceding stablecoins. Regardless, BUSD seems to have solved the inherent lack of trust with the earlier stablecoins like USDT and USDC.
BUSD was not simply issued by the company and exchanged for real USD dollars. There was an elaborate process to ensure that BUSD follows regulatory frameworks set by the governing body that issues the US dollar itself.
BUSD was made in partnership with crypto-based custodian bank Paxos that has had a long history of compliance with the New York State Department of Financial Services. Technically speaking, Paxos is actually the issuer of BUSD, not Binance, since all the US dollars that backs up the BUSD is kept in its custody.
This is wildly different from Tether, where the US dollars are kept in off-shore accounts, possibly to reduce taxation and operate under lighter regulations. Of course, that didn’t go too well with Tether Ltd., and the company suffered accountability issues since 2018.
Paxos as the USD custodian for Binance’s stablecoin also follows the typical rules set for FDIC-insured Trust Companies. For example, they do monthly audits of the custodial bank reserve with accounting firm Withum.
Despite being a better option in this regard, Tether remains to be the most popular stablecoin, possibly due to “a good branding”.
Tags:
Cryptocurrency