BUSD — a Stablecoin From Binance
Stablecoins are fast emerging as the crypto industry’s killer applications. By mimicking the price of traditional currencies, stablecoins like BUSD provide a much less volatile alternative to assets like BTC and ETH. BUSD is a fully-backed stablecoin issued by the leading crypto exchange Binance and partner Paxos, and the sixth largest crypto asset by market cap.
Many of the exchange’s trading pairs use BUSD as their quote currency. For example, when going long BNB/BUSD, a trader will swap BUSD to BNB in the expectation that BNB’s price will increase relative to BUSD. The stablecoin has a range of other uses, as we’ll explain below.
Why Binance USD?
Consistently number one by trading volume, Binance has risen to become one of the most trusted names in the crypto industry. With a huge percentage of the planet’s combined crypto trading volume going through Binance, it makes sense for the company to issue its own stablecoin.
If Binance were to rely on USDC or USDT — stablecoins issued by other companies — it would be forced to trust that Circle or Tether’s reserves matched their stablecoins’ circulating supplies. By operating its own stablecoin, it eliminates this counterparty risk.
BUSD is approved by the New York State Department of Financial Services and Paxos is a licensed custodian with significant experience issuing stablecoins. As of November 2022, BUSD had a total market cap of $22.8 billion. All the funds backing BUSD are held in segregated custody, eliminating any risk of a “run on the bank” type scenario.
Technology Behind BUSD
BUSD is a fully collateralized stablecoin on both BNB Chain and Ethereum. Fully collateralized means that for every 1 BUSD in circulation, Binance holds $1 of cash or cash equivalents in reserves. Binance issues BUSD in accordance with its reserves, either minting or burning the stablecoin as the stablecoin’s market cap grows or shrinks.
Fiat-backed stablecoins like BUSD are not to be confused with algorithmic stablecoins like the defunct UST on the Terra network. Algorithmic stablecoins are often completely unbacked and rely on market forces to maintain a dollar peg. Typically, such stablecoins fail when demand dries up and the confidence in the peg is shaken.
By having $1 backing each BUSD in circulation, every BUSD can be redeemed for $1. Therefore, its price always remains extremely close to $1. While the approach is much more centralized than crypto-collateralized stablecoins like DAI or algo stablecoins like UST, it does produce a much stronger peg than current alternatives. As such, the top three stablecoins by market cap are fiat collateralized.
BUSD Use Cases & How To Use BUSD
BUSD has a variety of use cases, some of which are unique to blockchain-based assets:
- Earning interest. Countless DeFi protocols across Ethereum and BNB Chain support BUSD.
- Medium of exchange. Stablecoins like BUSD are increasingly used in place of traditional currencies, particularly in places with weak national currencies.
- Earning yield. Binance itself offers a variety of centralized passive income-generating opportunities.
- Store of value. A digital dollar equivalent often provides a better medium to protect wealth in jurisdictions with very weak currencies.
- Trading. Many of Binance’s trading pairs are denominated in BUSD.
- Staking. Binance Launchpool supports BUSD.
- Buying NFTs. Some NFT marketplaces, like BNB Chain’s Open Bi Sea, support BUSD.
Despite the ongoing crypto bear market in 2022, Binance USD’s market cap has not declined dramatically over any long period. In fact, the stablecoin’s market cap is currently near its all-time high, as BTC is down nearly 80% from its November 2021 highs.
Should You Use Binance USD?
Binance USD is a popular product by two of the most trusted names in cryptocurrency. Binance is the biggest exchange by volume, and Paxos is a fully licensed crypto custodian. As such, BUSD is among the safest cryptos out there. Additionally, the asset is fully regulated in New York — an area known for its strict financial policies.
While not all trading pairs on Binance use BUSD — SOL to BNB (https://godex.io/exchange/sol-to-bnb) or BNB to BTC, for example — most do. Therefore, if you’re trading at the exchange, you’ll probably be using BUSD. Beyond trading, there are a host of other applications for the stablecoin. They include decentralized finance and real-world and online spending. Finally, people living with volatile local currencies can consider it as a medium of exchange or store of value.