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Stablecoins And BUSD: What Are They And How do they work?

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Blog / Marketing / How-to Guides

Stablecoins And BUSD: What Are They And How do they work?

BUSD

By BUSD

Created 2 months ago, last updated 9 days ago
6 mins read
Stablecoins And BUSD: What Are They And How do they work?

Table of Contents

What is a stablecoin?

A stablecoin is a cryptocurrency pegged to an asset with relatively low volatility, such as a fiat currency or other crypto asset. Stablecoins are designed to maintain a stable price so users can avoid market volatility risks.

Stablecoins can be categorized into three types identifiable by the underlying collateral: fiat-backed, crypto-backed, and algorithmic (non-collateralized).

1. Fiat-backed stablecoins

Fiat-backed stablecoins are cryptocurrencies pegged to traditional fiat currencies such as the US dollar or euro. They maintain a peg by keeping reserves that, in most cases, can be exchanged for a stablecoin. BUSD is one of the most trusted fiat-backed stablecoins available due to its transparency, attested reserves, and regulated status.

2. Crypto-backed stablecoins

The value of a crypto-collateralized stablecoin can be pegged to a fiat currency or another cryptocurrency. However, it maintains its reserves in crypto rather than fiat. Crypto-backed stablecoins usually over-collateralize their reserves as a measure against price swings in the value of the reserve asset.

For example, let’s look at the USD-pegged, crypto-collateralized stablecoin DAI. DAI is backed by an over-collateralized supply of another cryptocurrency, such as ETH. DAI requires a minimum 150% collateralization ratio, meaning that the dollar value of ETH deposited in a smart contract must at least be worth 1.5 more than the DAI being borrowed. For example, for a user to borrow $1,000 worth of DAI they have to lock in $1,500 of Ether. If the market price of Ether drops to the point where the minimum collateralization ratio is no longer met, the collateral is automatically paid back into the smart contract to liquidate the position.

3. Algorithmic stablecoins

Algorithmic stablecoins are those that do not involve the use of any reserve asset. Instead, the on-chain algorithms and smart contracts manage the tokens' supply like a central bank. This non-collateralized model, without any reserve assets, uses market operations to maintain a stablecoin’s value by increasing or decreasing its supply. However, successfully running an algorithmic stablecoin has often proved difficult.

TerraUSD, an algorithmic stablecoin, was one popular option. However, it dramatically lost its peg to the dollar in May 2022. Arbitrage maintained its 1:1 peg to the dollar for some time, as one TerraUSD was exchangeable for one dollar of LUNA. However, the decline in crypto markets led to a death spiral. This brought a loss of confidence and caused TerraUSD to lose more than 97% of its value.

What are stablecoins used for?

Crypto traders and businesses can use stablecoins to try to minimize the risks caused by market volatility. Let’s look at an example. Microsoft was an early adopter of Bitcoin and started accepting BTC payments in 2014. However, Microsoft stopped accepting BTC in 2016 and again in 2018 due to high volatility. To reduce the risk of volatility, Microsoft could have converted its holdings into a stablecoin like BUSD  and maintained their dollar value.

What is BUSD (Binance USD)?

BUSD is a fiat-backed stablecoin pegged to the US dollar and issued by Paxos. BUSD is available for purchase and redemption at a rate of 1 BUSD to 1 USD. The stablecoin was launched in September 2019 in partnership with Binance and is now the seventh largest cryptocurrency by market cap and the third largest stablecoin.

BUSD is an ERC-20 token issued on Ethereum. There are also BEP-20 and BEP-2 Binance-Peg tokens available with multiple use cases on BNB Chain and Binance.com. Nomic Labs has audited its smart contract, and top US auditor Withum attests to its reserve account balance.

How does BUSD work?

To maintain its one dollar value, Paxos holds an amount of US dollars equal to the total supply of BUSD. BUSD and USD are exchangeable at any time through Paxos. Let’s look exactly how:

  1. A user sends USD to Paxos' bank reserve account.
  2. The issuer (Paxos) creates the equivalent amount of BUSD on Ethereum.
  3. The newly minted BUSD is delivered to the user while the USD is held in the bank reserve account.
  4. The mechanism always works in reverse too. Users can burn BUSD with Paxos and receive $1 in return.

By burning/minting BUSD using the smart contract, the mechanism can keep the supply and reserves at a constant 1:1 ratio.

BUSD price and market capitalization

The price of BUSD is $ 1 per (BUSD / USD) with a market cap of around $18B. Click here to check the real-time live data.

What are the benefits of BUSD over other stablecoins?

There are a number of reasons why BUSD is a popular choice with many traders and investors. However, always remember that stablecoins are only as stable as the value of the underlying collateral. There is no such thing as a guaranteed peg, so this should be taken into consideration too.

  • Regulation. Paxos (BUSD’s issuer) and BUSD are both regulated by the New York State Department of Financial Services(NYDFS). On top of it, BUSD is “greenlisted” by the NYDFS since August 2020, making it pre-approved for custody and trading by any of the NYDFS’ virtual currency licensees.
  • Fully backed by cash with guaranteed deposits. Every collateralizing deposit is held at FDIC-insured US banks.
  • Attested. Every Paxos Standard bank account is overseen by US auditing firm Withum.
  • No fees. BUSD is issued and redeemed without any extra charges.
  • Transparency. Paxos publishes its BUSD monthly reserves report.
  • Security. Paxos has bankruptcy-remote accounts. Even in the unlikely event that Paxos Trust became insolvent, it would not go through standard bankruptcy procedures. Assets held in custody by Paxos Trust would be returned to their rightful owners.
  • Appealing trading fees. (1) Zero maker fees. On Binance. There are over 300 BUSD spot and margin trading pairs that now have zero maker fees for users who place orders on the order book. For market makers, they can enjoy appealing trading fees with BUSD. (2) Zero transaction fees. Besides, Binance offers zero transaction fees on all BUSD stablecoin pairs. If users hold other stablecoins but want to switch to BUSD, the process is totally free with Binance. (3)Zero gas fee on BNB Chain. In addition, users can withdraw Binance-Peg BUSD (BEP-20) with zero fees through BNB Smart Chain.

How to buy BUSD?

There are different ways to buy BUSD. You can find a few options for purchasing BUSD on our BUSD landing page.

Trade on Binance, the world's leading crypto exchange

The most convenient option is to buy BUSD on the secondary market – such as with an exchange like Binance. Binance provides many tradeable BUSD pairs and simple fiat gateways, making it easy to add BUSD to your portfolio. You can:

  1. Trade 250+ cryptocurrencies for BUSD on Binance.
  2. Use a bank wire transfer or a debit/credit card to purchase BUSD.
  3. Convert other selected stablecoins to BUSD with zero fees.

Buy BUSD on Paxos

BUSD is available on the Paxos platform for direct purchase and redemption 1:1 for US dollars or PAX.

Swap to BUSD with DApps

In addition, you can also explore the BUSD landscape to interact with various DApps such as PancakeSwap. BUSD is a commonly used crypto when providing liquidity and is also widely used in swappable token pairs on DEXs.

Contact BUSD team

Interested in collaborating with us on BUSD and Binance-Peg or want to learn more? Contact us through this Request Form, and our team will get back to you within 3 working days.

For more detailed information about BUSD, refer to the following resources:

Get started with BUSD today!

Disclaimer: BUSD is issued on Ethereum by Paxos and regulated by the NYDFS. Binance provides the pegged token service to lock BUSD on Ethereum and issues an equivalent amount of Binance-peg BUSD on other networks. Check out the proof of assets for more details. Please note that Binance-Peg BUSD is a Binance product. It is not issued by Paxos nor regulated yet by the NYDFS.

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