Maintaining Binance’s BUSD Peg: Changpeng Zhao’s Not Always Easy Puzzle

When the mechanism for obtaining stability is itself unstable – Guarantee the fixed value of a cryptocurrency backed by another asset while maintaining good capital efficiency represents a major challenge, which has been partially resolved at present. Just like the blockchain subject to the security, scalability and decentralization trilemma, the stablecoins must constantly arbitrate between price stability, capital efficiency and decentralization. Due to its centralized nature, Binance enjoys high capital efficiency (no need for over-collateralization), but seems to be plagued by price stability difficulties at times. Let’s analyze this more closely.

Binance announces that BUSD has not always been fully backed by reserves

shared during a recent communicated proposed by the American financial group Bloomberg, the information of transitional difficulties concerning the maintenance of parity between the dollar and the stablecoin Binance’s BUSD has not gone unnoticed.

And for good reason, between UST drop developed by Terraform Labs and rumors about reserves held by Tether, users of stablecoins are particularly wary of the strength and durability of such products. Furthermore, the issue of stablecoins by centralized entities makes transparent analysis all the more complex underlyings ensuring price stability on the markets.

Thus, Binance announced that it had not always been flawless regarding the management of the collateral supporting the BUSD. Indeed, his stablecoin was occasionally under-collateralized in 2020 and 2021due to a collateral shortage exceeding one billion dollars. The world’s largest cryptocurrency exchange, however, claims that the problem is now solved.

BUSD is a centralized stablecoin offered by Paxos on Ethereum, also issued on the BNB chain by Binance
BUSD is a centralized stablecoin offered by Paxos on Ethereum, also issued on the BNB chain by Binance

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Peg management, not always easy to coordinate

The situation has been well described by Jonathan Reiter and Patrick Tanboth analysts for the company ChainArgos. In a short dedicated study, they highlight the presence of latency in the management of the peg, in connection with organizational difficulties on the part of the various actors involved in maintaining the stability of the BUSD price. However, the report states that no users were affected by these transient episodes of depeg.

Issued in partnership with the company Paxos Trustthe BUSD was initially a ERC-20 token issued on the Ethereum blockchainbefore also being offers on the Binance Smart Chain, renamed BNB Chain in 2022. Binance has therefore implemented the system of “binance-peg”allowing to generate a BUSD on the BNB Chain by blocking a BUSD of Paxos on Ethereum, guaranteeing in theory a 1:1 ratio between the two versions of BUSD. The BUSD of the BNB Chain is therefore indirectly correlated to the dollar, through the BUSD ERC-20.

Nevertheless, it would seem that the reserves were not always equivalent on the two networks, indicating that some BUSD on the BNB Chain would have been issued without any collateralisation. It was actually about operational delays causing a bad synchronization of the update of the respective reserves.

In a context of general mistrust regarding centralized entities and their cash management, Binance calmly announces that it has provided at times a stablecoin partially guaranteed dollar. Despite the observation of the problem, the analysis of its origin and its resolution, this event leaves one wondering about the reliability of such systems, which are subject to human error. The advent of stablecoins decentralized seems inevitable, allowing in the long term a capital efficiency comparable to centralized players, but above all an unequaled transparency.

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Maintaining Binance’s BUSD Peg: Changpeng Zhao’s Not Always Easy Puzzle

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