What is Binance USD (BUSD) and How Does It Work?

What is Binance USD (BUSD)?

Binance USD or BUSD is another proof of packaged tokens that are tied to the value of another asset and are often referred to as blockchain tokens: for example, fiat currency, treasure stones, stocks, or real estate. In this context, BUSD is pegged to the US dollar, making it a wrapped token.

It’s also worth noting that most wrapped tokens behave like collateralized tokens and require another crypto asset (e.g., a local token of a decentralized exchange or DEX protocol) to be staked/locked in order to access the wrapped token.

How Binance USD Works

Binance USD is a fiat backed collateralized and regulated stablecoin pegged 1:1 to the US Dollar. The USD-denominated stablecoin was founded by two parent companies, Paxos and Binance, and is approved by the New York State Department of Financial Services (NYDFS). Notably, it was one of the few stablecoins approved in the US.

Paxos is a regulated blockchain technology company that offers its stablecoin as a service product to outside companies. In this case, they act as third-party reserves for Binance’s stablecoin in an FDIC-insured U.S. bank.

As with other packaged stablecoins, BUSD was created to enable easy transactions in the decentralized finance (DeFi) ecosystem. With BEP-2 wallet support
ERC-20
Although built on the token standard, the fiat-backed stablecoin is interoperable with multiple blockchains.

For every BUSD token a person owns, the equivalent of that amount is held in a real bank account. As mentioned above, an amount equal to the actual BUSD supply is held by Paxos, which acts as a third-party reserve in an FDIC-insured U.S. bank.

Since BUSD is a wrapped token, it is subject to the same market activities as its price equivalent. In other words, when the value of the fiat currency rises or falls, the same effect resonates with the BUSD token.

In general, BUSD is found in three different chains; Ethereum, Binance Smart Chain and Binance Chain can achieve three main features: accessibility, flexibility, and speed.

A Different Stablecoin: BUSD Technology

The mechanism behind BUSD is quite simple, especially compared to how difficult other stablecoins are to understand. Specifically, BUSD uses a deflation mechanism that ensures that the supply and reserve of BUSD/USD is maintained in a 1:1 ratio on a continuous basis. In other words, the mechanism ensures that each BUSD is redeemed for 1 USD in Paxos reserve.

When BUSD is purchased, a BUSD equivalent of this amount is created and the price equivalent is paid to Paxos for storage.

On the other hand, when a BUSD is sent to Paxos, the token is then burned by the blockchain infrastructure platform and provided with the price equivalent when a sell order is requested to maintain a fixed BUSD supply/reserve. AMERICAN DOLLAR. In a ratio of 1: 1.

The BUSD token is based on the ERC-20 token standard. As a result, it is compatible with a variety of ERC-20 smart contacts. Similarly, the token standard adopted by BUSD ensures interoperability between Ethereum-based exchange wallets.

What Does Binance Usd – BUSD Do?

BUSD has numerous use cases for investors and traders, and the most famous of them is to avoid price volatility in the crypto market. Since BUSD is a
stablecoin
, it is used as a store of value during periods of high volatility in the cryptocurrency market.

Another popular use of BUSDis arbitrage trading, where traders wait for periods when the value of USD to BUSD falls below a fixed 1:1 ratio.

For example; There are times when the value of the USD against the BUSD drops slightly below $1. During this time, traders can buy BUSD in bulk and wait for the value of BUSD/USD to return to a parallel position. At this point, they can sell it back for fiat currency and earn as little as $0.02 per BUSD traded.

Other notable uses of BUSD include making profits from other trading activities rather than converting them directly into fiat currency. This makes it easier to reinvest in an exchange, for example through trading or a pool of liquidity.

Finally, BUSD is one of the connected tokens. All in all, BUSD is one of the most standard pegged tokens that adorn the stablecoin market as it provides the necessary transparency and security, making it the best choice for investors and general crypto enthusiasts.