The well-known exchange Binance launched the yield asset BFUSD on 11/22, combining the stability of stablecoins with a reward mechanism. BFUSD can not only be used as margin for futures trading but also provides daily rewards for holders. Recently, it has attracted attention due to an average annualized return exceeding 26%. This yield product, which utilizes hedging mechanisms to earn funding rates, offers a single collateral compared to the Ethena protocol on-chain, but guarantees 1:1 redemption; plus, it is easier to deploy derivative assets into the contract market, maximizing yields, and has already attracted $500 million in capital.
What is BFUSD?
BFUSD is a yield asset launched by Binance, allowing users to use it as futures margin while earning rewards.
Stability: BFUSD can be exchanged 1:1 for the US dollar stablecoin USDT, suitable for users seeking stable yield solutions. (A 0.1% fee applies for exchanges and redemptions)
Reward mechanism: Users holding BFUSD who meet the conditions can receive stablecoin rewards based on the daily 'applicable reward rate'.
Multi-asset mode support: After enabling multi-asset mode, BFUSD can be used as margin for trading USDⓈ-M contracts.
BFUSD offers two types of reward rates, depending on whether users participate in USDⓈ-M contract trading activities:
Base Rate: Applicable to holders with no trading activity.
Boosted Rate: Applicable to holders who have participated in contract trading activities, usually higher than the base rate. Any opened USD (S)-M trades, regardless of asset mode (single or multi-asset) or margin assets, will count towards qualification for the boosted rate.
Source of BFUSD's yield
Binance provides rewards for users holding BFUSD, with the yield coming from the following two major components:
1. Funding rate income
Funding rate mechanism: In the futures market, the funding rate is a periodic payment between longs and shorts, helping to keep futures prices aligned with spot prices.
Hedging strategy: Binance adopts a 'delta-neutral strategy' to hedge positions in the futures and spot markets, reducing volatility risk and earning funding rates.
2. Staking rewards
Asset staking: Taking ETH as an example, Binance can stake ETH in Binance's Binance Earn program, allowing users to earn WBETH staking rewards.
Set up BFUSD reserves
Binance stated that to cope with potential funding rate costs and other possible expenses, it has established BFUSD reserves to ensure the stable operation of the system.
Initial funding: The initial funding when BFUSD launched was 1 million US dollars.
Independent operation: BFUSD reserves are independent of the futures insurance fund and do not participate in automatic deleveraging.
Adjustment mechanism: The scale of reserves will adjust according to market conditions and Binance's investment strategy.
BFUSD collateral asset pool: Used to maintain the stability of BFUSD, ensuring users can exchange BFUSD for stablecoins (such as USDT or BUSD) when needed.
BFUSD hedging portfolio: Binance uses hedging strategies to manage risks and maintain the safety and stability of funds.
Benefits of using BFUSD as margin?
Users need to enable multi-asset mode to use BFUSD as margin for USDⓈ-M contracts:
Dual benefits: While trading, holding BFUSD can continue to earn stablecoin rewards.
Stability: Even when funding rate costs are high in the short term, reserves can stabilize the system and reduce user risk.
Precautions before using BFUSD
Negative funding rate risk: When the funding rate is negative (shorts must pay longs), Binance may not be able to distribute rewards. However, even so, the base and boosted rates will not be negative.
Binance credit risk: The corresponding assets of BFUSD are controlled by Binance. If Binance faces bankruptcy or operational failure, users may not be able to redeem BFUSD. The reserves and hedge asset pool of BFUSD are Binance's own property, and users holding BFUSD are general unsecured creditors of Binance, unable to directly claim ownership of the asset pool.
Redemption delay: Binance may suspend redemptions for up to 7 days, during which BFUSD still counts as margin, but users cannot immediately obtain stablecoins. Large-scale redemption demands may cause delays and require Binance to adjust the asset portfolio.
Variable fees: Purchasing and redeeming BFUSD requires a fee, which may be adjusted at any time and should be confirmed before trading.
This article discusses Binance's newly launched yield asset BFUSD. Is it the Ethena protocol preferred by contract players? First appeared in Chain News ABMedia.
