Fresh from announcing the upcoming launch of Binance US and the impending block on U.S customers on Binance.com, the leading cryptocurrency exchange has caught the eye with another new product.
According to a Monday update, Binance is releasing what would be the first of many crypto-pegged tokens on its native blockchain, Binance Chain.
The concept of a crypto-pegged token, however, may sound new to some (most terms in crypto do), so we’ll try to define most plainly, what is a Bitcoin-pegged token?
What is Bitcoin-pegged Token?
To easily understand what is a Bitcoin-pegged token, you would have to define what ‘peg’ means in the crypto world.
‘Peg’ means to tie the value of one crypto to another or as we can see in the case of stablecoins, matching the value of crypto to fiat.
A typical example is Tether (USDT), which is pegged to the U.S dollar. In this case, 1 USDT will always be equal to 1 US Dollar ($1). Before releasing such a token, however, the company has to deposit money in a reserve bank while the people who buy the token trusts that the issuer will always have enough money with the bank to back the number of coins in circulation.
Now, that is what Binance is trying to do with its Bitcoin-pegged token.
A Bitcoin-pegged token means that the value of the token, which in Binance’s case is (BTCB) will always be equal to the cost of 1 BTC.
In other words, if 1BTC is $9300, then 1 BTCB will also be 1 BTC.
So, that is basically what a Bitcoin-pegged token means, noting that you could replicate this process for any other cryptocurrency, example Ether (ETH), Ripple (XRP) and so on.
You may wonder, though, why go through such a process when anyone could easily buy BTC.
Well, there could be other use cases, but the most apparent is the fact that it allows a decentralized exchange like Binance DEX to list tokens that are not native to the blockchain on which it is built.
In simpler terms, Binance DEX cannot directly list cryptocurrencies such as Bitcoin and Ethereum because these are not created on Binance Chain. The way to allow these users to trade these popular cryptocurrencies is by creating another token whose value would be the same as the real cryptocurrency.
Another advantage would be that instead of relying on a bank to audit the pegged-token reserve (Tether uses a bank for the USDT token), anyone can check whether the issuer has enough value of the cryptocurrency in reserve to back the number of tokens in circulation.
In the case of Binance, they provided the address of the reserve currency so anyone can quickly check whether the exchange is releasing more tokens than it stored.
In the end, pegging crypto tokens although not an entirely new concept to the community would likely become more prominent as the industry looks to build exchanges that do not have to comply with the strict incoming regulations for exchanges planned by global authorities.