Binance: A Case Study of BNB’s Success

Published in

Future Vision

11 min readJun 11, 2019

When it comes to trading digital assets, there’s no denying that Binance is one of the first exchanges that comes to mind. Derived from the words Binary and Finance, Binance is the brainchild of the now Twitter-messiah, Changpeng Zhao, better known by most as CZ. By leveraging his fintech experience building white label exchange systems, CZ and his team were able to create one of the most innovative and profitable companies in the blockchain industry today.

As a continual top 5 exchange on CoinMarketCap’s “Adjusted Exchange Volumes”, Binance averages around $1B worth of volume every 24 hours. Unfortunately, most professionals have agreed that these figures are largely due to fake volume and wash trading. Based on a recent publication by Bitwise, it’s estimated that only 13.9% of the past 6 month’s trading volume reported on CoinMarketCap can be confirmed as real volume. With this is mind, it’s extremely important to recognize that Binance was by far the biggest contributor of real volume.

As one of the few entities providing real liquidity, legitimacy and access to the most reputable digital assets on the market, we wanted to take a look at how this value has been captured by the exchange’s native token, BNB, and what other projects can learn from Binance’s success.

Setting the Stage

In June 2017, Binance released a whitepaper outlining their goal to build a world class digital asset exchange. Unlike the large majority of other whitepapers that emerged in subsequent months throughout the ICO boom, Binance’s whitepaper was straight to the point. With little design emphasis and a number of clear utility use-cases, Binance set their base conversion rate at $0.10 per BNB (1 ETH = 2700 BNB). Here’s a look at how simple their token distribution was initially articulated.

In the midst of the ICO boom in 2017, Binance was able to successfully raise their $15M target in a matter of minutes.

Opening the Floodgates

Now here’s where things start to get interesting.

Within two weeks of the ICO close, the first version of Binance went live. More importantly, this was one of the first examples of a working exchange token. From the very start, users could immediately receive discounts on trading, withdraw and listing fees when they used BNB.

By combining a matching engine capable of processing 1.4M orders per second and a token with tangible utility, Binance had created something that largely differentiated themselves from the hundreds of other ICOs in 2017 — a working product.

Note: Beyond a working product, Binance had already begun to anticipating how to profit off future demand by gradually diminishing their discount rate YoY.

What Makes BNB Unique?

For many of us who are well-versed in the blockchain industry, exchanges are far from novel. So, with thousands of competitors in the market, what propelled BNB to grow from it’s $0.10 ICO price to a current price of around $30 as of June, 2019?

Quarterly Burns

First and foremost, the company employs a strategy in which every quarter, Binance burns BNB from their reserve allocation relative to the amount of trading volume on their exchange. This strategy will continue until only 100M BNB (50% of the initial supply) remains. All burns that have occurred to date have been recorded on the Ethereum mainnet as follows:

*Revenue assumes USD spent reflects 25% of quarterly profits as illustrated by original whitepaper. Estimated USD spent reflects BNB price at the time of burn rather than current price(s).

Binance Launchpad

Before the term IEO (Initial Exchange Offering) became a hot topic, Binance was one of the first exchanges offering the ability to purchase tokens directly on their platform. Initially highlighted by the Bread and Gifto token sales, BNB allowed users to participate directly in a vetted ICO through an intuitive UX. At the time, this was a drastic improvement on the tech-heavy nature of how most ICO’s were conducted (cough cough, gas wars). Better yet, these Launchpad sales signaled near instantaneous liquidity as trading pairs become available less than a week after the close of the sale.

Compared to traditional equity securities in which secondary markets are only opened following an IPO years after seed-stage rounds, this nearly instantaneous liquidity was unheard of for traditional investors.**

Following the most recent 2018 bear market, Binance kept the dream of utility token sales alive by re-pioneering what an “attractive token distribution” looked like. Starting in February of 2019, Binance curated Launchpad sales for BitTorrent, Fetch.AI, Celer, Matic, and Harmony. Unlike the traditional ICO distribution, Launchpad sales have only allotted an average of 9.9% of the total supply with all private sales subject to 3-month vests. This meant there were no immediate dumps following the public listing and that supply was theoretically able to be much more organically distributed following the initial offering.

Better yet, the only way to participate in new Launchpad sales is through BNB. For reference as to why this positively affected the price of BNB, here’s a look at how Binance Launchpad projects have performed to date:

*Current prices and ROI reflect prices as of June 7th, 2019.

FOMO aside, we can further extrapolate that an estimated 3.026M BNB has been used to participate in Binance Launchpad’s alone ($90.8M raised calculated at an average of $30/BNB).

Lottery System

After recognizing that the traditional “first-come-first serve” system was quickly causing frustration among the community, Binance began experimenting with a “Lottery System” in which BNB ownership would dictate the ability to participate in Launchpad sales. The lottery draws are done through a transparent, randomized system to ensure fairness among all participants. In short, winning lottery ticket holders were the only ones eligible to participate in a Launchpad sale.

The first version of the Lottery system required users to hold a minimum of 20BNB in order to be eligible for a lottery ticket. While this was a step in the right direction, this system did not give any priority to those who were holding the largest amounts of BNB. In fact, this system actually incentivized people to create dozens of Binance accounts for friends & family to try and increase their chances at being able to participate and purchase Launchpad stakes beyond the stated caps.

In March 2019, Binance announced an updated lottery format in which prospective investors received lottery tickets based on the amount of BNB held over an n-day period — capped at 5 tickets per eligible account. Here’s a look at the BNB holding calculations for the most recent Launchpad sale, Harmony (ONE):

*Minimum requirements for eligibility are subject to change with respect to BNB/USD prices

For the Harmony IEO, there was a cap of 16,666 lottery tickets with an allocation of $300 per ticket. However, in order to become eligible, users were required to hold a minimum of 50 BNB ($1,500 at $30/BNB). Given how Launchpad sales have become massively profitable for ticket winners, the utility derived from BNB and the respective demand has become an extremely compelling use case for BNB holders.

Binance Chain & the BEP2 Standard

On top of a largely successful exchange, Binance recently released their own native blockchain in which BNB will be used for all transactions that occur on the network. On top of this native blockchain, Binance released the Binance DEX — a decentralized exchange which allows traders to issue and exchange Binance-based digital assets without having to deposit onto a centralized exchange.

“Binance DEX is made by the blockchain community, for the blockchain community, with support from Binance developers, as part of advancing our mission to spread the freedom of money. “

Best of all, Binance Chain creates a new token standard, BEP2, which inherently competes with Ethereum’s de-facto ERC20 standard. While there is nothing too novel with BEP2 specifically, some core features worth noting include burn, mint and freezing properties determined prior to issuance. Additionally, all issuance and transaction fees for BEP2 token use BNB as opposed to ERC20 tokens which use gas (ETH).

Binance DEX

Binance’s recent Harmony trading competition propelled Binance to be the most used DEX on the market at the time of the promotion. As we just saw with the Fantom listing announcement, it seems that tokens that are able to bring significant volume to the Binance DEX have a much better chance at being listed on the parent platform in the future. As such, this directly incentivizes new projects to adopt the BEP2 standard and encourage trading on Binance DEX for a better shot at making it to the big leagues.

As many of us in the blockchain ecosystem are aware, DEX’s biggest issues are liquidity and UX. With projects such as Uniswap leading the charge for consumer-friendly trading experiences, it will be interesting to watch how Binance’s DEX is able to compete moving forward.

What Makes Binance so Successful?

As we can clearly see from all of the use-cases highlighted above, BNB’s token economy is one of the most innovative examples of a company who has successfully been able to capture value in the native token. With this said, it’s important to recognize other factors that have contributed to Binance’s success.

First and foremost, Binance has extremely low barriers to entry. While KYC is recommended, it is currently not required. This allows anyone in the world to sign up and start trading cryptocurrencies with a verified email address — something that you currently can’t do on the large majority of other “real” exchanges. In addition, with the recent introduction of fiat on-ramps, it’s now possible to enter the digital asset market directly through Binance with fiat currencies, drastically lowering barriers to entry for new users.

By continually listing the most highly demanded projects in the space, Binance continues to be the go-to liquidity provider for every major digital asset. More so, Binance Labs is actively involved with the development and curation of projects they may plan on listing. As a result, Binance largely increases the chances at a project experiencing positive price action upon listing — something that is far and few among other exchanges.

In a world where exchanges pray on token projects through listing and success fees, Binance continually displays their value add through incubation, education and accessibility.

As mentioned in our introduction, CZ’s presence on Twitter has come to be recognized by most as one of the most transparent interactions a successful CEO has with their core audience. Whether it’s announcing new listings or distilling the details of a hack or security breach, the transparency Binance and CZ have continually provided is simply unmatched compared to existing competitors. Outside of their exchange, Binance posts regular announcementsand also includes:

An academy for blockchain and crypto education
A Blockchain Charity Foundation
Information on all cryptocurrencies listed on the platform
Incubation via Binance Labs
Institutional grade research reports and analytics
A recommended wallet for cold storage (Trust Wallet)

To summarize, Binance continues to be a first-mover for innovative initiatives within the crypto industry. To paint one clear example, here’s a look at a few notable exchanges who have recently adopted various alternatives of the “Binance Launchpad” in recent months.

Upcoming Features

Even with all of the new developments, Binance is just getting started. The exchange is set to release more features and BNB use cases throughout the rest of 2019 and beyond. With this in mind, here are some of the new features we could expect to be released in the coming year.

Stablecoin

Last week Binance CTO, Wei Zhou, announced that a Binance stablecoin will be released in as little as a few weeks. The stablecoin, Binance GBP, will be a fiat-backed stablecoin on the Binance Chain with a 100% reserve of British pounds (compared to most which are collateralized with US Dollars).

Zhou stated that the tokens will be entirely fiat-backed with significantly more transparency than some of the existing competitors. This move by Binance is perfectly timed given the current controversy surrounding the largest stablecoin in the market today, Tether, and its existing legal dispute with NY attorney general.

Margin Trading

Back in March of 2019, the Binance API was updated to add a few new variables including, “isSpotTradingAllowed” and “isMarginTradingAllowed” indicating that margin trading was coming to the exchange as originally outlined in the whitepaper back in 2017.

For those unfamiliar, margin trading allows traders to leverage themselves through a collateralized position to drastically increase their buying power and potential returns (or losses). As of now, BitMex is the leading exchange offering margin trading and has captured a significant amount of market share through this feature. As such, Binance is likely to introduce this feature in the near future given their cutthroat approach in attracting traders to the platform.

In the most recent developments, Binance just released a sign-up form to gain early access to margin trading. If you’re interested in testing out this feature, you can find the form here.

Futures

Similar to margin trading, futures contracts were envisioned in the original Binance whitepaper years ago. In turn, this past month, CME Bitcoin Futureshad the highest volume as Average Daily Volume (ADV) for BTC futures contracts exceeded $500M in May alone. The average daily volume has increased 1,188% since its inception in December 2017 and ultimately, is signalling a serious demand for crypto asset-based futures. Given the drastic increase in volume in recent months, we should expect the Binance team to begin offering this derivative to prospective traders in the relatively near future.

Conclusion

Given the current pace, Binance doesn’t seem to be slowing down anytime soon. While some have noted that Binance’s biggest challenges will be regulatory, the company seems to have found a crypto-friendly home in Malta.

Even though Binance has seen massive success since its launch, not everything has gone swimmingly. This past May, the exchange suffered from a security breach which resulted in the hacker stealing more than 7,000 BTC ($56M at $8,000/BTC). While there were a handful of proposed solutions to this hack, like a chain roll-back, Binance took the high road and covered the lost BTC with its own funds — showing themselves as a leading exchange with a strong sense of accountability.

While it’s been historically difficult to maintain leadership as the top digital asset exchange (Bittrex and Poloniex being perfect examples), we believe that Binance’s continual innovation and attention to community feedback will allow them to maintain their stronghold for the near future.

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Writers: Cooper Turley — https://twitter.com/Cooopahtroopa
Lucas Campbell — https://twitter.com/0x_Lucas

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Website: http://fitznerblockchain.consulting/