On Tuesday, the world’s biggest crypto exchange, Binance, admitted that its system had flaws due to which the supply of its stablecoin, the Binance Smart Chain (BUSD), was under-collateralized.
The BUSD is supposed to be backed 1-on-1 to the US dollar, but the exchange said that it is missing collateral of about $1 billion.
According to analysts, this issue has resulted in the BUSD slipping its peg at least three times by such a huge margin.
Peg maintenance
A spokesperson for Binance said that there are a number of teams involved in maintaining the peg and the process has not always been flawless, thereby leading to operational delays.
Paxos, a financial technology firm based in New York, oversees the process of BUSD’s collateralization on the Ethereum blockchain.
Therefore, it is fully collateralized there in US dollars, but when it comes to Binance Smart Chain, which is the company’s own blockchain, it is not regulated by an audited and external firm.
According to Binance, it maintains BUSD’s legitimacy by collateralizing it with BUSD regulated by Paxos. Therefore, the BUSD that it has on its own blockchains is called Binance-Peg BUSD.
The problems
It turns out that there were times when Binance-Peg BUSD was not able to maintain its peg at all. ChainArgos is a blockchain analytics firm and the company’s Patrick Tan and Jonathan Reiter have compiled and analyzed data.
It shows that the balance in the Binance-Peg BUSD wallet on the Ethereum blockchain, which needs to have all the BUSD necessary for backing the Binance-Peg BUSD, was often lower than the amount circulating on the Binance Smart Chain.
The data showed that there were three separate occasions between 2020 and 2021 when there had been an almost $1 billion difference between the balance in the wallet and the actual BUSD circulating on the blockchain.
A company spokesperson said that these had just been ‘delays’ in accumulating collateral, but they had corrected the pegging process since then.
The spokesperson said that they have improved the process recently and ensured it is pegged 1-1 via enhanced discrepancy checks.
Stablecoins
The purpose of stablecoins, such as BUSD, is to provide stability and trust in the crypto market, which is already un-collateralized and volatile.
Their value is linked to strong assets, such as the US dollar, for assuring customers that stablecoins will be able to maintain their stability, even when other digital currencies see huge swings.
The crypto ecosystem has suffered significantly due to companies that were not able to fully collateralize their stablecoins and do it in a transparent manner.
The UST stablecoin of the Terra blockchain is the perfect example, which collapsed last year and ended up wiping out almost $40 billion from the crypto market.
As a matter of fact, its collapse also triggered the ongoing crypto winter and its aftermath saw a number of companies file for bankruptcy.
Binance had assured its customers in the wake of the FTX collapse in November that it would improve transparency for proving that it was not mismanaged like FTX.