The object and purpose of this article is to analyze Binance Coin’s (BNB) role as the native token of the cryptoeconomic ecosystem that is emerging around Binance. BNB has already become, on its own merits, an effective monetary instrument. A tool enabling economic incentive alignment for all the stakeholders of the platform (in whatever its multiple dimensions) and that, at the same time, helps boost the network growth. By reviewing monetary history and the emergence of the “crypto” phenomenon, we can equate the role of BNB to that of the many different currencies, which throughout history, have articulated and powered the most diverse economies thanks to their properties as stores of value (SoV), mediums of exchange (MoE) and unities of account (UoA). That process is very helpful to try to predict the future value of BNB.
A short history of money
On Shelling Out: The Origins of Money, Nick Szabo describes some of the issues that the first human communities experienced while practicing barter. The main problem was the so called coincidence of wants (i.e the seller of the product must be interested in any of the items the buyer can offer, or the transaction is not possible). But we should also mention the difficulty of estimating amount and quality equivalences for very different products, as well as the inability to deal with huge volumes of commercial exchanges (a barter economy consisting in 500 products and lacking a common unity of account, would need 250.000 price pairs).
In line with Szabo, Saifedean Ammous also approaches the coincidence of wants problem. In his celebrated work The Bitcoin Standard: The Decentralized Alternative to Central Banking, Ammous explains the process by which the bigger and more specialized a market grows, the more complex the coincidence of wants becomes, as a result of several underlying reasons:
a) Scale problem (certain goods may be more valuable than others and hardly divisible in smaller units)
b) Temporality impact (some goods are perishable, and it’s difficult to accumulate large quantities of them to afford more valuable durable products)
c) Location effect (certain goods, for instance houses, cannot be transported).
In this sense, both authors argue that the earliest forms of money are nothing more than indirect exchange mechanisms. Szabo considers that the most archaic examples are the so called “collectibles” (e.g. beaded necklaces, seashells or certain types of stones).
We can define money, in general terms, as a good which is not consumed nor used to produce other goods, and that as a result of its extreme liquidity, represents an ideal medium of exchange.
Since high liquidity is considered an essential requirement of any form of money, the items traditionally chosen as currencies by human societies tend to present a high degree of salability, aiming to overcome all the shortcomings of barter previously mentioned. To cope with the scale problem, the currency must be divisible in smaller units. This feature involves the ability of being carried away easily (which allows to overcome the constraints imposed to barter by the location problem). In order to overcome the temporality effect, a currency must physically stand the test of time and preserve its value. All these features lead us to talk about 3 basic functions of any form of money or ideal currency:
- Store of Value: The currency must be immune to physical damage and its stock to flow must not increase dramatically at any point in time.
- Medium of Exchange: The money must be widely accepted as a trade intermediary instrument by the members of the community.
- Unit of Account: Once a currency reaches widespread adoption, it must be used to express the price of all the items of the economy (500 prices for 500 products is more practical than relying on 250.000 price pairs, as it’s the case on a barter economy without a common accounting unit).
Throughout history, different things have been used as currency by human communities: already cited “collectibles”, salt, cattle, different types of commodities (such as silver and gold coins), and lastly, banknotes (initially issued by private banks, and subsequently, by central banks of nations and supranational organizations). The original banknotes, redeemable in gold, would give way afterwards to the fiat version currently in force around the world.
The financial crisis of 2008 and the genesis of the cryptocurrencies
The popping of the real estate bubble in the USA (2006), was followed by the so called Subprime Mortgage Crisis in 2007, an event that ended up dragging down all the stock markets and global economies. The Lehman Brothers collapse in september 2008 is the perfect symbol, deeply rooted in the collective imagination of the people, of this period of great turbulence.
It’s in this context, that Satoshi Nakamoto published on a cryptography mailing list a revolutionary paper entitled Bitcoin: A Peer-to-Peer Electronic Cash System. Heir of the cypherpunk movement, the Bitcoin protocol embodied the genesis of a unique form of money, unprecedented in the history of humankind. The blockchain technology conceived by Nakamoto (an individual or group of people under a pseudonym) was designed as a Byzantine Fault Tolerant and Sybil-Attack-Resistant system, that as a side-effect, helped prevent “double-spending” (the main obstacle found by all the previous cryptographical endeavours that tried to deploy a reliable, decentralized and trustless peer-to-peer monetary system). Bitcoin, the first cryptocurrency in the history, represented to a certain degree Milton Friedman’s dream of attaining a pure form of digital cash money, censorship-resistant, and immune to the inflationary whims of governments (a set of features deeply appreciated by the acolytes of the austrian school of economics as well).
After Bitcoin’s release, other cryptocurrencies would follow, each of them with distinct features, but all relying on a higher or lesser degree on the blockchain architecture originally conceived by Nakamoto. Litecoin was created in 2011, Dogecoin and Ripple were launched in 2013, and Monero and Stellar would follow suit one year later. Special mention should also be made to Ethereum, the first Smart Contract Platform (i.e a blockchain platform that automatically verifies or enforces contracts through a protocol, whenever predefined conditions are met). Released in 2015, one of the most interesting features of the Ethereum platform is the ability to issue tokens, a feature that many crypto project took advantage of in order to raise funds through the so called ICOs (Initial Coin Offerings).
It’s in this context, in july 2007, that Binance succesfully conducted an ICO for the BNB token (placing on the market 100 million coins, that represented around 15 million dollars at the time).
BNB, the monetary engine that powers the Binance economy
BNB’s ICO has probably been the most successful so far. Not so much because of the money raised (a tiny amount compared to the more than 4 billion dollars raised by EOS at the top of last year’s crypto bubble), but because of the amazing results attained short after the ICO (in fact, some experts consider Binance the fastest company to become a unicorn ever). In little more than 3 months after its launch in july 2017, Binance positioned itself among the 3 leading crypto exchanges by market volume, largely because of its platform’s technical features and high performance (with an exchange matching engine able to process more than 1.4 million orders per second and provide service to 20 million users simultaneously), in addition to a company policy that puts safety of the customer funds in the first place (hence the famous slogan “Funds are SAFU”, popularized by its charismatic CEO Changpeng Zhao, aka CZ).
Today, Binance (combination of the words binary and finance) has become the world’s biggest cryptocurrency exchange. It registers the highest trading volume in 82% of the top 50 tokens by market cap. The platform has presence in the 7 continents and has deployed fiat-to-crypto onramps in several countries. Its original business as a crypto exchange, is currently complemented by the activity of its investment arm (Binance Labs), focused on the expansion of the infrastructure needed for a massive adoption of crypto around the world. In addition, Binance has entered the charity space through the newly constituted Binance Charity/Blockchain Charity Foundation (BCF), and is also offering learning resources on cryptocurrencies and blockchain technology through his educational arm Binance Academy.
All these elements constitute the basis of a thriving economy that, as mentioned in the introduction, cannot be fully understood without its main engine: BNB, the official token of Binance. Originally conceived as an Ethereum ERC-20, BNB is currently in the middle of a migration process to its own blockchain (Binance Chain), where it will become a native token and play an equivalent role to that of ETH on Ethereum.
This is a major structural change that, among other things, will allow Binance to launch its DEX (decentralized exchange). Given the great success of all its previous projects, it is reasonable to believe Binance DEX is going to become the leader of the decentralized exchange space as well.
What makes BNB valuable?
The first thing we must take into account when analyzing BNB as a digital asset, is the fact that it is a “utility token” and not a “security token”. A utility token is a token that acts as a medium of exchange and grants access to certain products or services on a blockchain platform. A security token, on the contrary, is a blockchain-based digital representation of a stock or any other asset that gives rights over the profits of a company without taking actual possession of it. The problem with security tokens is that in some countries only accredited investors can purchase them (in the case of the USA, the SEC is the agency that regulates the access and trade of securities). Being a utility token not limited to accredited investors was advantageous for BNB, because it allowed Binance to reach a broader audience during their fundraising (don’t forget that one of the main goals of the crypto revolution is to decentralize finance and make it accessible to everyone in the world).
Great, but what about the ROI? Is BNB a less profitable investment as a result of being a utility token and not a security token? Definitely not! Many analysts have proved that both kind of assets rely on the platform’s success: the greater the number of users accessing its services and believing in its future performance and returns, the more valuable the token becomes. While it is true that security tokens tend to be associated on traditional markets with the distribution of dividends, it’s worth noting that the latter often lead to a depreciation of the asset (hence, having a neutral effect on the ROI). For this reason, many traditional investors prefer to invest in companies conducting stock buyback policies than in those paying dividends (something that is in no way limited to securities).
In fact, one of the main cryptoeconomic incentive mechanisms implemented by Binance is the quarterly buyback of BNB tokens (using for this purpose 20% of the profits generated by the exchange during the period). Those BNB tokens acquired by Binance on the market via buyback are then burned as part of a process known as “coin burn” (which literally means that the tokens are permanently removed from circulation). This coin burn mechanism was originally described on the Binance Whitepaper and is expected to continue until the total supply of BNB reaches 100 million tokens.
Several analysts have proposed different valuation models for the asset. According to Andrew Kang, Binance has accomplished something quite unique with BNB, initially boosting its adoption as a fee discount token, but transcending this original function later on. Compared with other cryptoassets that lost around 90% of its value over the last bear market, BNB has performed as a potential store of value (SoV). In fact, widespread perception of BNB as a kind of “digital gold” lead some crypto lending platforms (e.g. Nexo and Libra Credit) to start accepting the token as collateral for their loans. That has reinforced BNB’s SoV status, ultimately leading to a virtuous circle of value accumulation. The fact that the crypto exchange business model is one of the most effective in terms of “network effects” (liquidity attracts more liquidity), only reinforces this dynamics.
Multicoin Capital, the crypto hedge fund founded by Kyle Samani and Tushar Jain in 2017, has been one of the last players to release a financial valuation of BNB. Multicoin considers that the economic value generated by the upcoming launch of Binance DEX (the already cited decentralized exchange of the company) will mostly be captured by the BNB token rather than Binance equity. This thesis connects with some of the ideas exposed on the official announcement of Binance Chain last year, when Binance claimed to be transitioning “from being a company to a community”. Kyle and Tushar believe that Binance could adopt in the future the form of a DAC or Decentralized Autonomous Corporation (probably the first ever?). Due to BNB’s prominent role on the economics of the leading crypto exchange by trading volume, Multicoin Capital concludes its report with the assertion that the asset keeps being dramatically undervalued by the market.
Here below there’s a list of the platforms and companies that have already integrated BNB:
As we have seen throughout this article, BNB already gathers all the required features to be considered an ideal form of money. During the recent bear market (which hopefully it’s already over), BNB has outperformed as SoV all the major cryptoassets, and as a result, it has been adopted as collateral by several crypto lending platforms.
BNB is being used on a daily basis as a medium of exchange and discount token on the Binance platform, and also offered as a payment option by many companies that provide different services. It’s also worth noting that BNB is the base-pair of 82 quote cryptocurrencies on the Binance exchange, as well as the unit of account used to determine the price of the tokens launched to the market through a IEO (Initial Exchange Offering) on Binance Launchpad.
The path followed by BNB to achieve money status in the context of an emerging global cryptoeconomy (where Binance Chain, most likely, will be central), doesn’t differ from that of the US dollar in its early days (when it acted as the fuel that powered the economy of the recently freed colonies that gave birth to the United States of America). As BNB, the US dollar also became money through utility and the 3 basic features of every ideal currency.
It’s impossible to predict the future, but one thing is for sure: even if we can equate the role of both currencies as driving forces of emerging economies, the digital scarcity that characterizes BNB (i.e. the fact that it has a hard cap in the spirit of Nakamoto’s original creation) suggests it will have a brighter future as SoV than any fiat currency issued by a central bank. A return to an international gold standard seems right now an unattainable utopia. However, we have a series of cryptocurrencies that not only replicate the economic benefits of such monetary system, but enhance them thanks to their digital nature.
The future belongs to cryptocurrencies. The future belongs to BNB.
I want to thank Jager for his valuable contributions.
Disclaimer: This article reflects my personal opinions and it should not be considered financial advice.