BUSD (Binance USD) has rapidly emerged as one of the most widely-used stablecoins in the crypto market. But how exactly does BUSD maintain its 1:1 peg to the US dollar? This in-depth guide explores the mechanics powering BUSD and how it achieves price stability.
How Does BUSD Maintain Its Peg?
Unlike algorithmic stablecoins, BUSD relies on a simple fiat-collateralized model to maintain its 1:1 peg to the US dollar.
For every 1 BUSD token issued, there is 1 actual US dollar held in reserves by Binance to back that token. The reserves serve as collateral, allowing BUSD to be redeemed for dollars directly from Binance if needed.
These fiat reserves are held in various forms like custodial bank accounts, certificates of deposit, and U.S. treasury bills. The specific composition is shared in monthly attestation reports.
Attestation Reports for Transparency
To provide transparency into its US dollar reserves, BUSD’s reserves are audited and validated monthly through attestation reports conducted by audit firm Withum.
The attestations certify that BUSD has sufficient USD reserves equal to or greater than the BUSD supply at the time of reporting. This verification is crucial for maintaining trust in BUSD’s full backing.
The latest attestation reports are publicly shared on the Binance website. This level of transparency exceeds most other stablecoins.
Role of Paxos Trust Company
BUSD is approved and regulated as a stablecoin by the New York State Department of Financial Services (NYDFS).
It operates under a license from the NYDFS granted to Paxos Trust Company. Binance and Paxos partnered to launch BUSD adhering to Paxos’ existing regulatory framework and oversight from the NYDFS.
This regulatory compliance enables BUSD to operate legally as a redeemable stablecoin fully backed by USD reserves.
Use of Smart Contracts
While the USD reserves are held centrally by Binance, BUSD leverages smart contracts on Ethereum and Binance Smart Chain to handle the issuance, burning, and transactions of BUSD tokens.
This allows BUSD to exist simultaneously on two major blockchains, improving interoperability and utility in DeFi ecosystems.
These smart contracts are open source and have been audited by CertiK to ensure they function as intended.
By combining fiat-collateralization, regular attestations, compliance standards, and smart contract automation, BUSD has created a transparent and reputable stablecoin ecosystem that lives up to its promise of 1:1 USD backing. This unique fusion of centralization and decentralization makes BUSD highly usable in the digital asset landscape.