DeFi Guides

Binance USD or BUSD is another proof of wrapped token, which is often described as a blockchain token pegged to the value of another asset – fiat currency, treasure stones, equity shares or real estate, for example. In this context, BUSD is pegged to the US dollar, which makes it a wrapped token. 

It’s also worth noting that most wrapped tokens act as collateralised tokens, requiring the staking/locking of another crypto asset (for example, a native token of a decentralised exchange or DEX protocol) in order to access the wrapped token.

General overview

Binance USD is a regulated, collateralised, fiat-backed stablecoin that is pegged to the US dollar at a 1:1 ratio. Founded by two major entities – Paxos, and Binance – the USD-denominated stablecoin was approved by the New York State Department of Financial Services (NYDFS). Notably, it was one of the very few stablecoins to get approved in the US.

Paxos is a regulated blockchain technology company that offers its stablecoin as a service product to external companies. In this case, they act as the third-party reserve for Binance stablecoin in an FDIC-insured US bank.

Just as with other wrapped stablecoins, BUSD was created to ensure ease of transaction within the decentralised finance (DeFi) ecosystem. And while it is built in compliance with the ERC-20 token standard with support for BEP-2 wallet, the fiat-backed stablecoin is interoperable with multiple blockchains.

For every single BUSD token owned by a person, an equivalent of that amount is held in an actual bank account. As mentioned earlier, an amount equal to the actual BUSD supply is held in the possession of Paxos who acts as a third-party reserve in an FDIC-insured US bank.

Also, given that BUSD is a wrapped token, it is subject to the same market activities as its fiat counterpart. In other words, when the value of the fiat currency goes up or down, the same impact resonates with the BUSD token. 

In general, BUSD exist in three different chains; Ethereum, Binance Smart Chain, and Binance Chain, while it is able to achieve three main attributes including accessibility, flexibility, and speed. 

Technology – how does BUSD work?

The mechanism behind BUSD is a fairly simple one, especially when compared to how difficult some other stablecoins can be to grasp. Notably, BUSD uses a deflationary mechanism that ensures the supply and reserve for BUSD/USD are constantly kept at a 1:1 ratio. In other words, the mechanism ensures that each BUSD is exchangeable for $1 USD in the Paxos reserve.

When BUSD is bought, an equivalent of that amount in BUSD is created while a fiat equivalent is paid to Paxos for safekeeping. 

On the other hand, when a BUSD is sent to Paxos, the blockchain infrastructure platform subsequently burns the token and provides you with the fiat equivalent when a sell order is requested, as a way of maintaining a constant supply/reserve of the BUSD/USD at 1:1 ratio.

The BUSD token is built on the back of the ERC-20 token standard. Consequently, it is compatible with several ERC-20 smart contacts. Likewise, the token standard adopted by BUSD enables interoperability among Ethereum-based wallets of exchanges. 

Use cases

BUSD has numerous use cases for investors and traders, with the most prominent among them being to avoid price fluctuation in the crypto market. Because BUSD is a stable coin, it is used as a store of value during high volatility periods in the crypto market

Another popular application for BUSD is arbitrage trading, in which investors wait for periods when the value of USD to BUSD falls below the constant 1:1 ratio. 

For example, there are times when the value of USD to BUSD falls slightly below $1. During this time, traders can buy BUSD in bulk and wait for the BUSD/USD value to return to a parallel position, at which point they can sell back for fiat and earn as low as $0.02 per BUSD traded.

Other notable applications for BUSD include locking in gains from other trade activities instead of converting directly to fiat. This way, it is easy to reinvest within an exchange, either by swapping or liquidity pooling for instance.

Ultimately, BUSD is one of the most standard pegged tokens to grace the stablecoin market as it provides necessary transparency and security which, in turn, makes it a top choice for investors and general crypto enthusiasts.

Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.

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