Binance USD

What is BUSD?

Binance USD, often referred to by its ticker symbol BUSD, is a fiat-backed stablecoin that is pegged 1:1 to the US dollar. It serves as a digital version of the US dollar and is backed by US dollars held in reserve.

BUSD, which is a theoretically stable asset in the short term because of its intended parity with the US dollar, offers flexibility to its users. Essentially, this means that you can convert cryptocurrencies to BUSD without moving off the blockchain.

Users can also send BUSD around the world fast and with very low fees while also using it as a safe haven from cryptocurrency price volatility.

Moreover, the hyperinflation being witnessed in several countries can also be weathered by BUSD, as the US dollar is currently the world’s reserve currency and one of the more stable ones.

When Was BUSD Launched?

BUSD was launched in September 2019 as an ERC-20 token on the Ethereum blockchain. It is regulated by the New York State Department of Financial Services.

The New York regulators, as per the Trust Charter and New York banking laws, ensure that the creation and burning of BUSD tokens are closely monitored. Furthermore, user accounts can be frozen and funds can be confiscated if illegal activity is detected.

Who are the Founders of BUSD?

BUSD was founded by Paxos, a stablecoin company that also created the gold-backed stablecoin PAX Gold, and Binance, a leading cryptocurrency exchange.

Paxos issues BUSD on the Ethereum blockchain as an ERC-20 token, while Binance offers a Binance-Peg BUSD token on their BNB chain.

Binance creates this BUSD under the BEP-20 token standard by holding BUSD in an Ethereum address. Then they simply mint peg BUSD tokens on the BNB chain corresponding to the tokens held in reserve.

Holders can swap ERC-20 and BEP-20 BUSD tokens between the blockchains via the Binance cryptocurrency exchange or through the Binance Bridge.

How Does BUSD Work?

BUSD is exchangeable 1:1 for US dollars in Paxos’ reserve. When holders send BUSD to Paxos, the tokens are burned and fiat currency is sent back. This ensures that supply and reserves are kept equal to each other.

BUSD’s peg is further protected by arbitrage traders who purchase BUSD in large quantities when its price slips lower than $1. They then use the Paxos platform to convert this BUSD back into fiat US dollars and book a profit.

By buying BUSD in large amounts, arbitrage traders create demand, which naturally pushes the price of BUSD back towards $1.

How is the BUSD Network Secured?

BUSD doesn’t have a blockchain of its own or a consensus algorithm, so it isn’t secured by itself. Instead, as an ERC-20 token on the Ethereum blockchain, BUSD is secured by Ethereum.

Ethereum currently uses proof-of-work consensus to mine new blocks and record transactions. This means that thousands of computers are solving mathematical puzzles and contributing their computing power to the network’s security.

What Makes BUSD Unique?

BUSD is unique for being the first stablecoin to gain regulatory approval.

It also enjoys a considerable amount of trust for being launched by two highly respected parties in the cryptocurrency industry, with Binance being one of the biggest exchanges and Paxos having garnered a solid reputation in the stablecoin business.

As an ERC-20 token, BUSD can be used across various decentralized applications (dApps), smart contracts, and in the world of decentralized finance (DeFi). BUSD can be exchanged instantaneously for other stablecoins, often without fees. It is constantly developed by Binance to be used in various financial products on their platform.

What is BUSD Backed By?

BUSD is backed by the fiat dollars held by Paxos in reserve and is audited every month in keeping with the New York Department of Financial Services regulation framework.

This makes BUSD significantly different from stablecoins like USDT which are unregulated and have never had third-party audits confirm the strength of their reserves.

What is the Use of BUSD?

One of the most common uses of stablecoins like BUSD is for cryptocurrency investors to lock in gains in a manner that retains liquidity. While cashing out into fiat will create settlement times of up to a couple of days, trading into and out of BUSD is almost instant and allows traders to enter and exit positions at will.

Furthermore, BUSD is often used as a safe haven from volatility in the crypto markets and economic conditions like hyperinflation, particularly in countries that use different currencies than the dollar. In the short term, the dollar’s relative stability can provide a decent store of value.

BUSD is also used in arbitrage trading not just between itself and fiat but also in decentralized exchanges (DEX), especially with BNB Chain automated market makers (AMM). When prices differ between liquidity pools, arbitrage traders can quickly take advantage of opportunities thanks to BUSD being accepted on all involved platforms.

What is an AMM?

An automated market maker is a type of DEX that uses a mathematical formula to price assets rather than a traditional order book.

AMMs decentralize the process of market making with the use of smart contracts and liquidity pools. Users called Liquidity Providers lock funds into these pools to form the funds that traders will trade against. They are incentivized to do so by collecting the fees incurred in trades against that pool.

AMMs have different designs. Uniswap, for example, uses a simple mathematical formula of (Token 1) x (Token 2) = constant.

When traders then start to buy Token 1 from the pool, they start to incur a greater and greater premium the more they buy. The price of the tokens is constantly updated reflecting the ratio of the tokens remaining in the pool after the trade.

Who Controls BUSD?

BUSD is developed by Binance and Paxos manages BUSD reserves. The Paxos-issued BUSD is regulated by the NYDFS.

Within its smart contract, BUSD has the regulatory function “SetLawEnforcementRole.” This piece of code allows Paxos to uphold NYDFS regulation by freezing user accounts or removing funds in case of illegal activity.

However, Binance issued Binance-Peg BUSD on the BNB Chain (also referred to as the Binance Chain or Binance Smart Chain) isn’t issued by Paxos or subject to NYDFS regulation. As such, it operates according to different procedures.

How Much BUSD Is In Circulation?

As of June 2022, the circulating supply of BUSD amounts to over 18 billion BUSD, making it the third-largest stablecoin and one of the top 10 cryptocurrencies at the time.

This significant level of BUSD adoption can be attributed to its issuance by Binance and Paxos, two trusted entities, as well as the auditing and regulation of its reserves by a respected regulator in the NYDFS.

This has also aided BUSD’s adoption by many entities, including booking sites like Travala (AVA), payment gateways and APIs, multi currency payment services, DEXs, and even other centralized exchanges.

How Do You Buy BUSD?

You can purchase BUSD from various cryptocurrency exchanges, including that of its co-founder Binance. You can also purchase and redeem BUSD directly from Paxos or buy it on many decentralized exchanges.

Is It Possible to Buy BUSD Instantly?

When purchasing BUSD using a decentralized exchange on Ethereum or Binance Smart Chain, the settlement of BUSD is extremely fast. The transaction speed depends only on how fast the blockchain’s consensus is. As soon as a new block is mined, the BUSD will hit the user’s wallet.

However, purchasing through a service like Paxos using fiat may take a little longer due to the vagaries of settlement when it comes to fiat currencies. Traditional finance is notably slow in this regard, so depending on how you pay for the BUSD, settlement time will differ.

Credit card companies usually have quicker settlement times, but bank transfers and wires can take longer.

Finally, purchasing BUSD on a centralized exchange’s order book may seem instant, but the funds don’t actually hit the user’s wallet.

Instead, the amounts in the user’s account are simply a reflection of trades they make. The actual settlement only happens when the funds are transferred out into a private wallet.

How Do You Store BUSD?

As mentioned above, you can store BUSD in an exchange or a private wallet.

An exchange isn’t really a wallet, but rather a large pool of funds in the exchange’s name out of which a small portion is allocated to the individual user. However, with private wallets, you can take full custody of your funds.

Private wallets come in two forms: hot wallets and cold wallets.

Cold wallets are often considered safer, as they are kept offline. Simply writing down the private key on a piece of paper or saving it on an offline hard drive both count as cold wallets.

Hot wallets, meanwhile, are those that connect to the internet. They often take the form either of desktop clients that are stored on the user’s hardware but require an internet connection or third-party wallets that use the hardware of the provider.

Browser extensions like the widely used Metamask and the highly-rated GameStop wallets are also very popular, especially in the Ethereum ecosystem.

BUSD Energy Consumption

BUSD doesn’t have its own blockchain or consensus mechanism, so its energy consumption is a non-issue when compared to the energy drawn by blockchains like Bitcoin and Ethereum.

However, that negligible power draw can certainly be set in a favorable light when compared to the vast and energy-hungry ecosystem around fiat cash.

The energy demands of the global dollar printing framework, security, transport, and storage required to manage fiat currency and the banking industry as a whole can only be imagined.

Is BUSD a Good Investment?

BUSD doesn’t offer any potential to overhaul the US dollar, which over the past few years has been significantly outperformed by plenty of cryptocurrencies. Even Bitcoin started at a valuation of a few cents and increased to tens, hundreds, thousands, and now even tens of thousands of dollars.

However, it can be a good investment in the context of a volatile or downward-trending cryptocurrency market. Investors residing in countries affected by inflation and currency depreciation greater than that of the US can also expect gains from BUSD relative to their local currencies.

BUSD is a more liquid version of the dollar and can be transacted—and settled—almost instantly. This means that traders can be more agile when using BUSD as a medium of trade or a way to book profits.

What are the Risks of Owning Stablecoins?

The main risk an asset-backed or fiat-backed stablecoin faces is a threat to its reserves.

However, Paxos-issued BUSD mitigates that risk with frequent audits and regulatory scrutiny, giving investors some guarantee that its reserves are solid.

Furthermore, unlike an asset-backed stablecoin, fiat-based stablecoins’ reserves are fiat and thus BUSD and the reserve US dollars can be redeemed directly.

An asset-backed stablecoin is riskier because the non-cash assets in reserve may lose their value for any reason. They are also illiquid and thus can’t be redeemed upon demand.

Central Bank Digital Currencies, or CBDCs, are a potential threat whose implications are unclear. While increasingly discussed in many forums, they have yet to be adopted.

Still, the emergence of ‘official’ digital dollars may lead to a crackdown on alternatives like BUSD and other stablecoins.