BCGAME - Free 5BTC Daily Bonus!In this article, we will discuss:
Introduction
If you've purchased or traded encryption with Binance, you've probably already encountered BUSD. The token is common among trading pairs that Binance offers on its exchange. In short, the BUSD acts as a digital version of the US dollar and is indexed by its value.
For newcomers, it's not always obvious why traders and investors hold the BUSD. The role of the BUSD and other stablecoins is, however, an essential part of the cryptoecosystem.
What exactly is BUSD?
BUSD is a stablecoin founded by Paxos and Binance. Paxos uses technology blockchain to offer your 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 the BUSD and PAXG tokens.
On a technical level, BUSD is a fiat-backed stablecoin that maintains a US dollar parity. An amount in US dollars equal to the total supply of BUSD is in the custody of Paxos, acting as its reserves in US banks insured by the FDIC. When the price of the US dollar goes up or down, the price of the BUSD also goes up in equal amounts. This is the most common and traditional stablecoin model.
BUSD offers three main attributes for transactions: accessibility, flexibility and speed. The token is easily accessible via Paxos or Binance. You can purchase them through Binance's currency exchange or fiat gateway services, or send an amount in US Dollars to Paxos to mint new BUSD tokens for you.
The BUSD also offers flexibility by allowing encryption users to quickly turn their holdings into a stable asset without leaving the blockchain. Finally, using BUSD, a user can quickly send money around the world at nominal rates.
The token exists on three different blockchains: Ethereum, Binance Smart Chain and Binance Chain. Owners can exchange their tokens between blockchains depending on their needs. This can be done on the Binance exchange (when making withdrawals) or via the Binance Bridge.
How does the BUSD work?
The mechanism for holding the BUSD peg is relatively simple compared to other types of stablecoin. Each BUSD can be exchanged for 1 USD of reserves. When you send your BUSD to Paxos, they will burn your tokens and provide you with the fiat currency. This mechanism keeps supply and reserves at a constant ratio of 1:1.
Whenever the price of the BUSD starts to drop below $1 per 1 BUSD, arbitrage traders will buy the BUSD in large quantities. Even a price of $0,98 could provide them with an opportunity to profit. After buying large amounts of BUSD, arbitrators can then convert the BUSD tokens into fiduciaries via the Paxos platform. An increase in demand for BUSD naturally raises the price of the token back to $1, restoring the 1:1 peg.
How is the BUSD regulated?
New York state regulators have imposed specific measures on Paxos, Binance and how stablecoin should operate. In addition to making sure the token is fully secured, Paxos must carefully control the creation and writing of BUSD tokens. Paxos also has the right to freeze accounts and remove funds if necessary due to illegal activities. All of these principles are in accordance with the Trust Charter and New York banking laws applicable to stablecoin.
Embedded in the token's smart contracts is a new role that reflects the regulation of stablecoin: SetLawEnforcementRole . This short piece of code allows Paxos to use the aforementioned powers to uphold NYDFS regulations.
Why do people use BUSD?
Based on the attributes we talked about earlier, the BUSD has several use cases for crypto traders and investors.
Avoid price fluctuations in encryption markets
The cryptoecosystem can be very volatile. As in traditional financial markets, there is also a demand for stable assets in cryptography, especially when the market becomes very volatile. When converting assets into trusts or bonds, traditional investors can face a volatile period. The BUSD offers the same opportunity for crypto traders and investors.
Secure earnings without the need to convert to fiat
When someone wants to close an investment and secure their profits, the BUSD offers a highly liquid way to do so. No need to wait to transfer trust funds to your bank account from an exchange. If you decide to enter a new position or buy another asset, you also don't have to wait to recharge your account with new trust funds.
Arbitration
BUSD is a highly popular stablecoin in Binance Smart Chain and many automated market manufacturers (AMM). These liquidity pools can provide arbitrage opportunities when prices differ between different AMMs. Holding the BUSD allows arbitrators to move quickly between exchanges and take advantage of the wide acceptance of the BUSD across different platforms. As mentioned earlier, there may also be arbitrage opportunities through BUSD buying and fiat withdrawal.
How is BUSD different from other stablecoins?
BUSD differs from other stablecoins on the market for some important reasons. Firstly, BUSD is part of a category of fiat-backed stablecoins. There are also encrypted stablecoins that use cryptographic assets for their reservations, like DAI , for example.
There are also algorithmic stablecoins without any guarantees. These projects try to control stablecoin provisioning with algorithms for creating and writing tokens.
But how does the BUSD differ from other fiat-backed stablecoins? A key point is that Paxos launches regular audits, showing the US dollar reserves that correspond to the supply of BUSD 1:1.
Accounting firm Withum completes these audits as part of the BUSD's requirements as a regulated cryptocurrency. Not every project does this, and some trustee-backed stablecoins may not have all the reserves they claim.
For example, a case filed by the New York Attorney General indicated that reserves for Stablecoin Tether (USDT) were not 100% backed by fiat. This finding was in direct contradiction to previous statements made by Tether.
BUSD network metrics
As of June 2021, BUSD is the second largest stablecoin by market capitalization, with approximately $9.600.000.000. This value includes your value in ERC-20 tokens and the BEP-2 and BEP-20 versions of the currency. Although it has gained in popularity, there is still a significant difference between its market capitalization and its biggest competitor, Tether.
At the time of writing, BUSD also has a relatively high Volume / Market Capitalization of 0,4286. This number measures the trading volume of a currency in 24 hours compared to the total market capitalization. Bitcoin (BTC), for example, has a Volume/Market Capitalization of 0,06059. In essence, this shows that BUSD is used regularly, rather than just left in portfolios like you would with a long-term investment. This principle fits the use cases we mentioned earlier.
Where can I get BUSD?
There are a few different ways to buy BUSD. You can find a few different purchase options on the BUSD landing page. One option is to buy BUSD on the secondary market. Binance has many tradable BUSD pairs as well as simple fiat gateways. You can trade another cryptocurrency or fiat currency on the exchange or use a debit or credit card to buy BUSD.
Another method is to go to an AMM and exchange another currency or token for BUSD in a liquidity pool. Alternatively, you can go to the Paxos website and convert US Dollars directly into BUSD. Paxos will take your fiat, add it to the reserves and then mint new coins for you.
Final Thoughts
BUSD acts as a stable investment and useful tool for traders and investors. Its regulated status and audited reserves held in trusted financial institutions give the currency a high degree of reliability. For those who regularly use Smart Binance Chain or Binance Chain, BUSD is a solid choice of stablecoin to use alongside other projects.
