What is BUSD?
BUSD is a regulated stable coin backed by fiat and pegged to the US dollar. There is one reserve US dollar for every unit of BUSD. In other words, the available supply of BUSD is pegged to the US dollar at a ratio of 1:1. BUSD holders can exchange tokens for fiat currency and vice versa. The issuer of the Paxos token conducts a monthly BUSD inventory audit.
As a stable coin, BUSD is designed to maintain a stable market value. It allows investors and traders to store assets on the blockchain without the threat of volatility and without having to move them out of the crypto space.
Introduction
If you have bought or traded cryptocurrencies on Binance, you have probably come across BUSD before. The token is often found among the trading pairs that Binance offers on the exchange. In other words, BUSD is the digital version of the US dollar, pegged to its value.
It is not always obvious to beginners why traders and investors hold BUSD. However, BUSD and other stable coins are an important part of the crypto ecosystem.
What exactly is BUSD?
BUSD is a stable coin created by Paxos and Binance. Paxos uses blockchain technology and offers stable coins as a service to third parties. The issuer previously created a gold-backed stable coin called PAX Gold (PAXG). BUSD and PAXG are regulated by the New York State Financial Services Authority (NYSDFS).
Technically speaking, BUSD is a fiat-backed stable coin that is pegged to the US dollar. A US dollar amount equal to the total amount of BUSD is held by Paxos in US banks and acts as a reserve insured by the Federal Deposit Insurance Corporation (FDIC) and the US Treasury. When the price of the US dollar rises or falls, the value of BUSD also changes. This is the most common and traditional stable coin model.
The main features of BUSD transactions are availability, flexibility and speed. The token is available through Paxos or Binance. You can purchase it on the Binance exchange, through the Binance fiat gateway, or send US dollars to Paxos to issue new BUSD tokens for you.
The flexibility of BUSD is expressed in the fact that users can quickly convert cryptocurrencies into a stable asset without withdrawing funds from the blockchain. And finally, thanks to BUSD, users can quickly send money around the world with minimal fees.
Paxos issues BUSD on the Ethereum blockchain. In addition, Binance offers Binance-pegged BUSD, the BNB token. Binance creates BUSD (BEP-20) by storing BUSD in an Ethereum blockchain address and issues pegged tokens, each corresponding to BUSD in the Binance reserve. At the same time, owners of BUSD (ERC-20) and BUSD (BEP-20) can move tokens between blockchains at their discretion. This can be done on the Binance exchange via withdrawal or via the Binance Bridge.
How does BUSD work?
The peg mechanism for BUSD is relatively simple compared to other types of stable coins. Each BUSD can be exchanged for 1 US dollar from the reserves. When you send your BUSD to Paxos, they burn your tokens and give you back fiat currency. The mechanism maintains a constant supply and reserve ratio of 1:1.
How is BUSD regulated?
New York state regulators have put in place specific measures regarding Paxos, Binance, and how the stable coin should operate. In addition to fully backing the token with dollars, Paxos must carefully control the creation and burning of tokens. If illegal activity is detected, Paxos has the right to block accounts and remove funds. These principles are in line with the «Charter of Trust» and New York banking law applicable to the stable coin.
A new function is built into the smart contracts of the token, which reflects the regulation of the stable coin: SetLawEnforcementRole. This little code snippet allows Paxos to implement the permissions mentioned earlier while respecting the NYDFS rules.
Why do people use BUSD?
BUSD and Binance-pegged BUSD have multiple use cases for crypto investors and traders.
Protection against price fluctuations in cryptocurrency markets
The cryptocurrency ecosystem can be very unstable. As in traditional financial markets, in the world of cryptocurrencies, there is a high demand for stable assets, especially when the market is highly volatile. By converting assets into fiat money or securities, traditional investors can ride out a period of volatility. A similar opportunity for crypto investors and traders is offered by BUSD and BUSD linked to Binance.
How is BUSD different from other stable coins?
BUSD differs from other stable coins in the market in several important ways. First of all, BUSD belongs to the category of fiat-backed stable coins. In comparison, there are stable coins backed by cryptocurrencies that use crypto assets like DAI as reserves.
In addition, there are algorithmic stable coins without any collateral. These projects control the supply of stable coins through token creation and burning algorithms.
Conclusion
For traders and investors, BUSD is both a stable investment and a useful tool. Its regulated status and reserves, which are kept in reliable financial institutions and are regularly audited, give the coin a high degree of reliability. For anyone who regularly uses Binance Smart Chain or Binance Chain, BUSD will be a great stable coin to use along with other projects.
