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What Is BUSD and how does it work?

What Is BUSD and how does it work?
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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 is a stablecoin founded by Paxos and Binance. Paxos uses blockchain technology to offer their Stablecoin as a Service product to external companies. In the past, they also created a gold-backed stablecoin called PAX Gold (PAXG). The New York State Department of Financial Services regulates both BUSD and PAXG tokens.
On a technical level, BUSD is a fiat-backed stablecoin that maintains a U.S. dollar peg. An amount of U.S. dollars equal to the total supply of BUSD is held in custody by Paxos, acting as its reserves in FDIC-insured U.S. banks or backed by U.S. Treasuries. When the price of the U.S. dollar rises or falls, the price of BUSD also does in equal amounts. This is the most common and traditional model of stablecoin.

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.

BUSD also offers flexibility in allowing crypto users to quickly turn their holdings into a stable asset without moving off the blockchain. Finally, by using BUSD, a user can quickly send money around the globe with nominal fees.
Paxos issues BUSD on the Ethereum blockchain. In addition, Binance offers a Binance-Peg  BUSD token on BNB Chain. Binance creates BUSD (BEP-20) by holding BUSD in an Ethereum blockchain address and minting peg BUSD tokens, each of which corresponds to a BUSD token held in reserve by Binance. BUSD (ERC-20) and BUSD (BEP-20) holders can swap their tokens between the blockchains depending on their needs. This can be done on the Binance exchange (when making withdrawals) or through Binance Bridge.

(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.

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.

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.

Arbitrage

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?

BUSD differs from other stablecoins in the market for a few significant reasons. First of all, BUSD is part of a category of fiat-backed stablecoins. There are also crypto-backed stablecoins that use crypto assets for their reserves, like DAI, for example.

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.

For example, a case brought by the New York Attorney General indicated that the reserves for the stablecoin Tether (USDT) were not 100% fiat-backed. This discovery was in direct contradiction to previous statements made by Tether.

Where can I get BUSD?

There are different ways to buy BUSD. You can find a few options for purchasing BUSD on the BUSD landing page. One option is to buy BUSD on the secondary market. Binance has many tradeable BUSD pairs as well as simple fiat gateways. You could trade another cryptocurrency or fiat coin on the exchange or use a debit or credit card to purchase 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.

Closing thoughts

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.

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