Crypto exchange Binance officially introduced BFUSD on Tuesday, a "reward-bearing margin asset" that enables users to earn passive rewards by holding it or trading futures with it, with the product set to launch on Wednesday (Asia time).

"BFUSD is designed as a margin asset for futures trading while also providing passive rewards," a Binance spokesperson told The Block. "BFUSD holders will enjoy a Base APY [annual percentage yield] that accrues on a daily basis even if they don't trade futures, and those with qualifying USDⓈ-Margined Futures trading activity will enjoy a higher Boosted APY for that day instead."

USDⓈ-Margined Futures are futures contracts on Binance that use stablecoins like USDC or USDT as collateral and settlement currency, offering a stable trading experience by mitigating the volatility associated with using cryptocurrencies as collateral.

The Binance spokesperson claimed that, based on recent historical data, the base APY for BFUSD has ranged between around 12% and over 35% during the period from Nov. 20 to Nov. 25. Additionally, the boosted APY is said to have reached between roughly 15% and over 47% during that time. It’s worth noting, however, that BFUSD is set to go live on Nov. 27 at 02:00 UTC, at which point eligible users can begin purchasing it. These figures have not been independently verified.

Only eligible Binance Futures users in supported markets can purchase BFUSD, the spokesperson said, noting that the futures platform is restricted in certain regions, including the U.S.

The Binance spokesperson said that BFUSD is "not a stablecoin" because it cannot be withdrawn from a Binance futures account or traded on the open market. "It can only be used as margin for futures trading on Binance, and redeemed with Binance for USDT stablecoin," they said.

BFUSD generates returns through two strategies: delta hedging crypto assets between spot and futures markets to collect funding fees and staking ether. Delta hedging involves offsetting the price risk of a spot position with an opposing futures position. In crypto markets, funding fees — which long-position holders pay to shorts when the funding rate is positive (and vice versa when negative) — ensure spot and futures prices eventually converge.

BFUSD's structure might seem similar to Ethena's "synthetic dollar" USDe, which also uses delta hedging to provide rewards. However, the Binance spokesperson said BFUSD is different from USDe, though they declined to elaborate further.

A person familiar with BFUSD's and USDe's workings told The Block that "USDe in itself doesn't bear reward. It is up to users of USDe to utilize it as they wish," while "BFUSD is a margin asset that bears passive rewards for holders."

Binance assured users that BFUSD's reward rate or APY "will never go below zero," protecting holders from negative returns. "There will be times when the APY for BFUSD is negative when the market is bearish and the funding fee income is negative. However, what we have designed BFUSD to do is that in good times, a portion of the total APY generated is kept in the BFUSD Reserve Fund. So that in times of negative funding rate, users will not pay for the negative funding which is covered by the Reserve Fund," the spokesperson said.

They went on to say that "historical data shows that the ETHUSDT trading pair's funding rate has been positive for 350 out of the previous 365 days. On a quarterly basis, funding fees have been mostly positive since the founding of Binance Futures in 2019. This provides a strong basis for BFUSD's ability to generate APY consistently."

Binance plans to generate total APY on BFUSD and distribute the majority as daily rewards in USDT stablecoin, while allocating a portion to the reserve fund. The reserve fund, initially seeded with 1 million USDT, will support hedging strategies and cover potential negative funding rates.

The Binance spokesperson did not disclose the exact percentage split between user rewards and reserve fund allocations but stated it would be "sufficient to protect users."

Both base and boosted APYs for BFUSD will be calculated daily and are expected to fluctuate. "Funding rates are going to be a significant factor in Binance's determination of the reward rates that it will pass on to BFUSD holders," the spokesperson said. "In a very bullish market (like currently), the funding rates paid by longs to shorts on futures positions can be higher, and therefore result in higher reward rates."

For now, BFUSD's purchase and redemption fees are set at 0.1%, subject to change. However, during the promotional period from Nov. 27 to Dec. 26, users can purchase BFUSD without incurring fees and participate in earning 100,000 USDT in bonus APY and USDT vouchers.

At launch, USDT will be the only supported asset for BFUSD transactions, meaning all purchases, rewards and redemptions will be denominated and paid in USDT, the spokesperson said.

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