What Are Stablecoins?
Stablecoins are cryptocurrencies pegged to relatively low-volatility assets, such as fiat currencies or other crypto assets. Designed to maintain stable prices, they allow users to mitigate risks associated with market fluctuations.
Stablecoins can be categorized into three types based on underlying collateral:
Fiat-backed Stablecoins
- Pegged to traditional fiat currencies like the USD or EUR.
- Maintain reserves redeemable for the stablecoin (e.g., BUSD).
- Example: BUSD, known for transparency, verified reserves, and regulated status.
Crypto-backed Stablecoins
- Overcollateralized to absorb price volatility of reserve assets (e.g., ETH backing DAI).
- Example: DAI requires a 150% collateral ratio—$1,500 ETH locked for $1,000 DAI borrowed.
Algorithmic Stablecoins
- No collateral; supply managed via smart contracts (e.g., TerraUSD, which collapsed in May 2022).
Use Cases for Stablecoins
- Reducing Volatility Risk: Businesses like Microsoft could convert crypto holdings to stablecoins (e.g., BUSD) to preserve USD value.
- Trading: Avoid market swings while staying in the crypto ecosystem.
What Is BUSD (Binance USD)?
BUSD is a fiat-backed stablecoin pegged 1:1 to the USD, issued by Paxos and approved by NYDFS. Key features:
- Regulated: Compliant with NYDFS standards since 2020.
- Fully Reserved: Backed by FDIC-insured cash deposits.
- Transparent: Monthly reserve audits by Withum.
- Zero Fees: No cost for issuance/redemption.
👉 Explore BUSD’s real-time market data
How Does BUSD Work?
- Users deposit USD into Paxos’ reserve account.
- Paxos mints an equivalent amount of BUSD (ERC-20).
- Redemption: Burning BUSD returns USD 1:1.
Smart contracts ensure a 1:1 supply-reserve ratio.
Advantages of BUSD
- Regulatory Security: NYDFS oversight.
- Fee-Free Trading: Zero maker/taker fees on Binance for BUSD pairs.
- Cross-Chain Utility: Available as ERC-20, BEP-20, and BEP-2 tokens.
👉 Learn more about BUSD’s benefits
FAQ
Q: Are stablecoins truly stable?
A: Only as stable as their collateral. Algorithmic variants (like TerraUSD) carry higher risks.
Q: How is BUSD different from USDT?
A: BUSD is fully regulated and transparent, while USDT’s reserves have faced scrutiny.
Q: Can BUSD lose its peg?
A: Extremely unlikely due to 1:1 USD reserves and regulatory oversight.
Q: Where can I use BUSD?
A: Trading, DeFi, and payments—supported on Ethereum, BNB Chain, and Binance.
Stablecoins like BUSD bridge crypto and traditional finance, offering stability in a volatile market. Always verify collateral and regulatory compliance before use.