What Is BUSD and how does it work?
- August 10, 2022
- Binance Academy Crypto
- Kuro Satoshi
If you’ve purchased or traded crypto with Binance, you’ll likely have already come across BUSD. The token is common among the trading pairs Binance offers on its exchange. In short, BUSD acts as a digital version of the U.S. dollar and is pegged at its value.
For newcomers, it’s not always obvious why traders and investors hold BUSD. The role of BUSD and other stablecoins is, however, an essential part of the crypto ecosystem.
What exactly is BUSD?
BUSD offers three key attributes to transactions: accessibility, flexibility, and speed. The token is easily accessible through Paxos or Binance. You can purchase them through Binance’s exchange or fiat gateway services, or send an amount in U.S. dollars to Paxos to mint new BUSD tokens for you.
(Binance-Peg BUSD is a Binance product; it is not issued by Paxos nor regulated by the New York State Department of Financial Services.)
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.
How is BUSD regulated?
New York state regulators have enforced particular measures on Paxos, Binance, and how the stablecoin must operate. Along with making sure the token is fully collateralized, Paxos must carefully control the creation and burning of BUSD tokens. Paxos also has the right to freeze accounts and remove funds if needed due to illegal activity. These principles all adhere to the Trust Charter and New York banking laws applicable to the stablecoin.
Inbuilt within the smart contracts of the token is a new function that reflects the regulation of the stablecoin: SetLawEnforcementRole. This small piece of code allows Paxos to use the powers mentioned previously in upholding NYDFS regulations.
As noted above, these features apply to the Paxos-issued BUSD on Ethereum. Binance-Peg BUSD, issued by Binance on BNB Chain (formerly Binance Chain and Binance Smart Chain), operates pursuant to different procedures and is not issued by Paxos or regulated by the NYDFS.
Why do people use BUSD?
Based on the attributes we talked about earlier, BUSD and Binance-peg BUSD have multiple use cases for crypto investors and traders.
Avoid price fluctuations in crypto markets
The crypto ecosystem can be very volatile. Like in traditional financial markets, there is also demand for stable assets in crypto, especially when the market becomes too volatile. By converting assets into fiat or securities, traditional investors can ride out a volatile period. BUSD and Binance-Peg BUSD offer the same opportunity to crypto investors and traders.
Lock in gains without needing to convert to fiat
When someone wants to exit an investment and secure their profits, BUSD and Binance-Peg BUSD provide a highly liquid way of doing so. There’s no need to wait to transfer fiat funds into your bank account from an exchange. If you decide to enter into a new position or purchase another asset, you also don’t need to wait to top up your account with new fiat funds.
Both BUSD and Binance-Peg BUSD are highly popular stablecoins on their respective networks and with BNB Chain automated market makers (AMM). These liquidity pools may provide arbitrage opportunities when prices differ between different AMMs. Holding BUSD and Binance-Peg BUSD allows arbitragers to quickly move between exchanges and take advantage of BUSD and Binance-Peg BUSD’s wide acceptance on different platforms. As mentioned earlier, there may also be arbitrage opportunities through purchasing BUSD and cashing it out for fiat.
How is BUSD different from other stablecoins?
There are also algorithmic stablecoins without any collateralization at all. These projects attempt to control the stablecoin’s supply with algorithms to create and burn tokens.
But how does BUSD differ from other fiat-backed stablecoins? One key point is that Paxos releases regular audits, showing the U.S. dollar reserves matching the supply of BUSD 1:1.
The 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 might not have all the reserves they claim.
Where can I get BUSD?
Another method is to head to an AMM and swap another coin or token for BUSD or Binance-Peg BUSD in a liquidity pool. Alternatively, you can head to the Paxos website and convert U.S. dollars directly into BUSD. Paxos will take your fiat, add it to the reserves, and then mint new coins for you.
BUSD acts as both a stable investment and a useful tool for traders and investors. Its regulated status and audited reserves held in trusted financial institutions give the coin a high degree of reliability. For anyone who regularly uses Binance Smart Chain or Binance Chain, BUSD is a solid choice of stablecoin to use alongside other projects.