Why Binance and its BNB tokens are on fire (in a good way)
Set against the recent explosion in DeFi, a four-year-old centralized crypto exchange like Binance might easily have started to lose its shine. By any metric, however, the opposite has happened: Binance has only grown in stature and value despite the DeFi movement, even among decentralization aficionados, and it’s instructive to think about why.
(Disclaimer: My investment firm, BR Capital, holds BNB tokens, which is one reason among many why this article shouldn’t be taken as investment advice. My intention in writing here on Medium is to ruminate, maybe even educate, but not to offer advice or recommendations.)
I’m going to pin down three sources of value within Binance that can help to explain the extremely high market cap of the Binance token (BNB) today, as well as how it compares to the market cap of other centralized exchanges like Coinbase and even traditional fiat exchanges like the London Stock Exchange. I’ll also point out some limiting factors, because Binance’s centralized roots still pose risks that anyone holding BNB should be wary of.
1. Binance has CZ
Blockchain isn’t about blocks or chains or even smart contracts, but about people. Whether we’re builders or users, whether we organise ourselves as companies or DAOs, we all want to be inspired and Binance’s CEO is certainly inspirational.
No, I’m not talking about Brian Brooks, the former holder of one of the American government’s strangest job titles (“Acting Comptroller of the Currency”) who recently became CEO of Binance.US. I’m talking about the Chinese-Canadian founder and CEO of the whole outfit, Changpeng Zhao.
CZ, as he’s widely known, is arguably approaching the same stratospheric level as Vitalik Buterin in terms of influence within the crypto community, just like how Binance’s own blockchain is gradually catching up on Ethereum. A key reason for this credibility is that CZ is, like many of Binance’s users, is vocally and passionately in crypto for the long haul. For example, neither he nor any of his team has sold any of their stake in Binance — whereas Coinbase staff sold plenty of theirs at the earliest opportunity. This is something people notice!
(You may have noticed that CZ said “We’ll burn it all.” We’ll address these arsonist tendencies of his in the next section.)
On the flip side, let’s not forget that Binance is centralized, which means that human beings and organisations — its staff, journalists, regulators, governments, unhappy users etc. — can harm its future if they want to or if they simply made bad mistakes. CZ could be pressured into giving up his principles, Binance could be banned in certain jurisdictions, or have its reputation tarnished and so on, but these are the same risks that apply to any centralized outfit.
2. Binance has token burning
Binance has a highly effective token burning strategy, which is one reason why its BNB token has grown in value so quickly — even rebounding quicker than BTC and ETH after the recent market correction this week.
Why does token burning matter? And how can it create value rather than destroying it (which is technically what burning is)? I’ll try to explain.
If a token like BNB has real utility, people will want it. Once there is consistent demand, the price will depend on supply. Burning tokens — which means verifiably destroying them beyond all possible use — reduces available supply and therefore creates price momentum, or at least it creates a strong expectation that the price will increase and therefore that holding BNB will be sensible rather than dangerous.
With BNB, the token burning strategy is working because BNB tokens have fundamental utility that is beyond dispute. These include:
- Reduced commission fees on Binance trades;
- Increased referral fees if you bring new people to Binance;
- Early access to Binance Launchpad projects, which often begin with airdrops and other goodies;
- Perhaps most importantly, BNB is the fuel of Binance’s own blockchain, which provides a distinct set of further incentives (so long as Binance’s blockchain remains popular). We’ll cover these in the next section.
3. Binance has DeFi
Wait, if Binance is centralized, how can it also do DeFi? Because Binance is now more than just an exchange. It also has its own blockchain, Binance Smart Chain (BSC), which can be used to run all manner of decentralized projects, including those doing DeFi. Thanks to popular uptake of BSC, Binance’s ecosystem is actually very diverse:
The growing traction of BSC (shown in the chart below) is helping to grow the value of the BNB token, because BNB is the fuel of BSC, just like ETH is the fuel of Ethereum. The more transactions there are on BSC, the greater the value of the rewards that are paid to the 21 validators of the blockchain. Anyone who holds BNB tokens and stakes them (i.e. locks them in) with one of these 21 validators will in turn get a share of their rewards, so holding BNB will effectively pay interest in the form of more BNB, with an APR of up to 27 percent as of March 2021.
The risk of course, is that BSC’s popularity may wane in the future, because there’ll be consolidation in the blockchain space and we simply don’t know who the winners will be — but again, this sort of risk applies to plenty of other investments.
So, how to value Binance?
As we’ve seen, Binance started out as a regular centralized crypto exchange and for many of users that’s still all it is. Valuing it this way, you can compare it to Coinbase and this makes Binance look expensive: BNB tokens have a market cap of over $80 billion, while Coinbase’s market cap is “only” $60 billion. Besides, BNB tokens aren’t even a direct share of the exchange business in the way Coinbase shares are.
In terms of value as token exchanges, where profits ultimately come from commissions on transactions, the valuations of both Binance and Coinbase may seem high. For reference, back in the world of fiat exchanges, the London Stock Exchange Group has a smaller market cap of around $40 billion, yet it makes around twice the annual revenue of Coinbase or Binance.
However, the market cap of BNB doesn’t take token burning into account, and if we’re holding BNB long-term then it should do. If BNB held its current value ($560) for the next 5–10 years while the token burning schedule was completed, there’d be 100 million BNB left in circulation with a market cap of $56 billion.
This is not a crazy valuation when you consider that Binance already has 15x more users than Coinbase does *and* it has its own growing blockchain and ecosystem of projects that is continually adding to BNB’s value utility. The value of this ecosystem is hard to determine right now, as it’s so new, but long-term I wouldn’t be surprised if it became more valuable than the exchange business.
In the end, you can’t dismiss Binance BNB as just a “centralized” token. If anything, CZ’s vision for the company and its coin has been clever and pragmatic, opening up a path towards greater decentralization and hence a much broader ecosystem and user base — and that’s the real strength of the BNB token.
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