Progress or Regress :
Significance and Limitation of
Tran-fee Mining & Dividend Distribution Exchange Model
Block Crafters Research Division
- Young Lee
- Heetae Yoon
- Michael Park
Introduction
In the summer of 2018, mining & dividend distribution exchange tokens appeared in the market grabbing every investors’ attention with sweet benefits that exceeds previous exchange tokens. Commission discount from earlier exchange tokens was no comparison. Every commission made through transaction was refunded with exchange tokens and the profit of exchange returned to token holding users. Mining & dividend distribution exchange tokens presented a new level of beneficial profit model to users. How did such model appear in the market? Can this model maintain its beneficial cycle?
Definition of Dividend/Mining exchange tokens
‘Dividend/mining tokens’ are tokens that can be bought through transaction-fee with dividend features that offer a share of the profit of the exchange to the token holders. Dividend tokens offer users a straightforward passive income model just by holding the token. Dividend payback provides transparent and secure method to show how exchange profit is distributed to the users, gaining faith and royalty from the users.
Debut of Dividend/Mining exchange token
Dividend/Mining exchange token is a derivative form of exchange token. After the major Chinese exchanges pumped up their users and funds by issuing their own exchange token, new entering exchanges were also prepared with their own exchange tokens. As mentioned in the article “The history of exchange token and its significance”, exchange tokens are closely related to the quantity of users and transaction volume. The entering exchanges lacked both market size and the number of users. So, they need to differentiate themselves from previous ones. As a result, a new feature was added to these “next generation” exchange tokens, dividend payback.
Dividend features first appeared with the debut of 2nd generation exchange token, KuCoin token. KuCoin was well known for its new profit-sharing methods with existing users through referral commissions and dividend payback. Every existing user shared the exchange profit. Each user was also the marketer of KuCoin and the number of users grew exponentially. But KuCoin showed its limitations soon after. KuCoin exchange can only increase the profit if the revenue from users (or the total volume of transactions) increases. However, the increase in the number of users is not directly related to the increase in exchange revenues. Multiple factors from UI/UX to credibility and attractiveness of investment targets must be considered to activate the transactions of the users. The referral and dividend system led to an increase in the number of users but failed to activate transaction. In other words, existing users from other exchange were only attracted to opening a new account in KuCoin exchange and did not engage in additional activities.
So then, the later exchanges needed additional feature that could lead users to voluntarily start new transactions. 3rd generation exchange tokens came into the market with dividend tokens that users can receive when a transaction occurred, later they described this activity as ‘mining exchange token.’ Mining exchange token is a combination of dividend payback with transaction commission refund with exchange token. In other words, the user receives exchange token for transaction commission refund purposes from every transaction made. These tokens will give users a passive income through distributing a portion of the exchange revenue in proportion to the amount of exchange tokens. The ‘mining token’ method is positively evaluated since it successfully led users to voluntarily participate in trading within the exchange. As a result, the FCoin exchange achieved world’s top daily trading volume, $17 billion, in just two weeks. In addition, the latter ‘mining token’ exchanges such as Bit-Z and CoinBene also hyper jumped in weeks, placing themselves to top-level exchange immediately after issuing the mining token on the market.
Unfortunately, ‘Dividend/mining token’ method maintained its legacy only for a short period of time. There is no unconditional profit model, and all investment targets are accompanied by realization of profits. The rapid increase of the token price and continuing trend of high demand encouraged the early investors to realize their profit sooner than expected in high volume and causes dramatic price drop. As a result, investors’ demand to purchase exchange tokens for dividend income also shrinks and the rate of price decline becomes faster. This leads to a decrease in the total trading volume of the exchanges, which leads to a decrease in dividend income, which then leads to deterioration of the investors holding the exchange tokens. Finally, the price of the exchange tokens is further lowered.
Dynamics of Dividend/Mining exchange tokens
Understanding the dynamics between mining and dividend is important for understanding the price fluctuation of dividend/mining exchange tokens. In this token model, intrinsic value of the token came from the amount of dividend. From this perspective, Dividend/Mining exchange tokens can be regarded as a kind of beneficial securities. So, expected price of the token can be calculate based on future profitability, expected future dividend. However, Due to limited information, people can only guess future dividend based on current amount of dividend and short-term trend of dividend change. Therefore, the price of the token is in proportion to the amount of last dividend and change in dividend per token leads to price of token changed. for example, in the case of Coz, token of Coinzest, we can see that the price of tokens fluctuates with the change in dividend amount. This has shown that investors react sensitively to change in amount of dividend.
The relationship between dividend and price can creates an explosive feedback cycle based on synergy with the mining through transaction. Let’s assume a token price increase. If token price goes up, some traders expect that the trend of token price change will remain the same at least for the short-term. These positive forecasting increases the expected value of mining through transaction. Therefore, these traders make more transaction and use more fee to earn exchange token. These actions increase total transaction volume of the exchange and result in an increase in dividend per token. The increase in dividend affects the price of token directly and indirectly. The rise of dividend increases the intrinsic value of the token, while at the same time making the future value of the token more valuable by providing a positive expectation for additional dividend. As a result, the rise of dividend creates an increase in expected prices. Through this virtuous cycle, the price of tokens and total trading volume of exchange will rise explosively.
Unfortunately, the reverse of this virtuous cycle also occurs in decline situation. If token price goes down, traders expect that the token price will decline at least short-term and these negative prediction decreases the expected value of mining through transaction. As the expected value of mining decreases, the transaction volume also decreases and eventually the dividend per token decreases. The decrement of dividend ruins the intrinsic value of the token. Moreover, it makes the future value of the token less valuable by eliminating an expectation for additional dividend. As a result, the decrease in dividend creates a decrease in expected prices. Through the same dynamics, but with opposite direction, the price of tokens and total trading volume of exchange will plummet.
As mentioned above, the Dividend/Mining exchange tokens model has characteristics that eventually will fall into two opposite cycles. When the price changes, this pressure will be amplified by feedback process and it accelerate change of the price in the same direction. the acceleration continues until the specific moment when the direction of the price trend changes, and this is repeated in a different direction. It means that the high price volatility is a natural feature of the Dividend/Mining exchange tokens.
Can it be sustainable?
As shown in the previous section, the natural characteristics of Dividend/Mining exchange token model are bound to have extreme volatility. This characteristic can impair the stability of business. Nevertheless, it is certain that Dividend/Mining exchange tokens model affects the activation of exchange trades. That is why a lot of new entrants adapt Dividend/Mining exchange tokens model for their business. However, one of the most important question, sustainability of Dividend/Mining exchange tokens model, remains unanswered.
To verify sustainability of Dividend/Mining exchange tokens model, we must check structural sustainability of the model itself first. With the purpose of analyzing the characteristics of the model itself, it is necessary to separate the influence of the external environment. To this end, we designed a simple computational experiment based on agent-based modeling method and have tested its structural sustainability in an isolated environment. We assume that the simple exchange is issuing token steadily and traders decide the buy, sell and trans-fee mining according to the current token price and expected token price. We define that the expected token price consists of three sources, expected value of dividend, expected value based on dividend change and expected value based on price change. Therefore, the expected pricing model we have used in this experiment is as follows.
The experiment result shows that the market dynamics without external influences. In early stage, price of the token increase dramatically due to the expectation for additional dividend and price increases. However, this upturn didn’t last for long. The expectation for additional dividend and price rapidly decreases as increment of the dividend and price slows down. Even if the actual dividend increases, this decline in expectation leads to price going down and a reduction in dividend eventually.
Fortunately, as mentioned above, this cycle didn’t end in one direction. Slowing down of decline in price and dividend have a positive impact to expected price and it makes price go up again. However, result shows that the height of the rebound is gradually reduced. This is the effect of the decrease in dividend due to the steady increase in the number of tokens. Gradual increase in the number of tokens slightly reduces the rate of increase in dividend but its impact is significant because it weakens the virtuous cycle as the cycle repeats. The overall downward trend in price causes significant problem to mining exchange. In most case, exchanges limit the number of tokens issued to minimize the impact of decrease in dividend. If traders have a high priority for mining, total trading volume of exchange is bounded by token price and amount of newly issuing token. Therefore, the downward trend of price leads to decrease of total trading volume of exchange. It means that there is no structural sustainability of Dividend/Mining exchange tokens model itself unless it is combined with additional schemes acting as a positive reinforcement to the model’s sustainability.
Not only structural sustainability of model itself, but resilience to external impact also important to verifying sustainability. However, historical data shows that the Dividend/Mining exchange tokens model is also vulnerable to external impact. Figure 6 shows price trend of bitcoin and three Dividend/Mining exchange tokens, COZ of Coinzest, CAP of Cashierest and BYT of Bytex. In this period, BTC had experienced one big drop at 9/5 and a few small fluctuations such as 8/29. Even if these three Dividend/Mining exchange tokens successfully start the virtuous cycle, their price was determined by one big drop of Bitcoin price. All three tokens price dramatically drop more than half on 9/5. Furthermore, BYT had experienced plummet caused by small fluctuations of Bitcoin on 8/29.
This phenomenon occurs because the unstable nature of the model amplifies the external impact. Even a slight external shock causes a great tragedy on the sustainability of the exchange. Nevertheless, the bigger problem is that once the price plummet, it is hard to turn over the trend. As we described above, the ability of the model to maintain upturn-virtuous cycle diminishes as the amount of token increases. So, even if the positive external impact occurs, it cannot recover the previous negative impact.
Conclusion: The model has potential, but needs further evolution
In this article, we defined the significance and the limitation of the Dividend/Mining exchange token model to explain the Dividend/Mining exchange fever. To explain this, we analyses the dynamics underlying the token model. And we challenged internal and external sustainability of the Dividend/Mining exchange token model historical and theoretically. As a result, we find that the rapid increase of the trading volume based on the rise of the token price at the beginning is a structural characteristic of the model. At the same time, we also find that this initial success is vulnerable to external impact and will decay because of the fundamental problem of the model.
In real case, almost all Dividend/Mining exchanges have failed to maintain pumped trading volume and lose their influence rapidly. Even Fcoin that once hit $17 billion in trading volume transact only $56 million these days. From these results, it can be said that at least the current Dividend/Mining model is a fail. Nevertheless, it cannot be denied that this model successes to provide a powerful solution for the most difficult problems all new exchanges face, gaining early user acquisition and transaction volume. To overcome the limitations of the Dividend/Mining model we uncovered in this article, various attempts have been made continuously. For example, Becent have adopt the concept of dividend based on moving average to avoid sudden collapse by slowing down negative vicious cycle and try to maintain the legacy of model by leveraging margin trading and index fund. Conversely, Bgogo attempts to change the rule of game by using competition among institutional investors.
From this perspective, the million-dollar question is, how do we convert the model to a sustainable exchange model smoothly without compromising the potential of the Dividend/Mining exchanges model. In this manner, ironically, an important factor to forecast the success of the Dividend/Mining exchange can be in how well it designs additional reinforcement schemes that are not directly related to the Dividend/Mining. A dominant design of a new type of exchange or exchange token have not yet appeared but attempts to make this evolution will continue.
Reference
- KuCoin whitepaper : https://assets.kucoin.com/kucoin_whitepaper_en.pdf
- Fcoin whitepaper : https://www.fcoin.com/static/ft-en.pdf
- Cashierest whitepaper : https://www.cashierest.com/CoinInfo/CAP
- Bytex whitepaper : https://s3.ap-northeast-2.amazonaws.com/btyex-static-resource/whitepaper-KR.pdf
- Becent whitepaper : https://www.becent.com/white-paper/v1.2.0-ko.pdf
- Bgogo whitepaper : https://bgogo.com/assets/white-paper/BGG-Token-Whitepaper-v2.0KR.pdf
- https://www.coinzest.co.kr/app/cxweb/cb/CB1002.jsp
- https://blog.coinfi.com/can-this-exchange-dethrone-binance-how-fcoin-rose-to-17-3-billion-usd-daily-volume/
- https://www.coinhills.com/ko/market/exchange/
