The BNB Token Model — a Story of Success
The year 2018 left a lot to be desired for cryptocurrency investors. Out of the Top 50 cryptocurrencies, only two show a positive year-to-date performance: Metaverse (+15%) and Binance Coin (+28%). But how exactly did Binance manage to have the value of its token increase?
What makes Binance Coin (BNB) Successful?
Binance Coin is an ERC-20 token created by the cryptocurrency exchange Binance. Even though Binance only started operation in July 2017, it quickly became world’s largest exchange by trading volume. This outstanding success can be attributed to:
- A well designed and responsive website with one of the world’s best trading engines;
- A simple, yet powerful token model.
Binance’s CEO Changpeng Zhao has an impressive track record of building trading software. In 2005, he founded Fusion Systems — a high-frequency trading systems for brokers. He also worked as CTO for OKEx — formerly the biggest cryptocurrency exchange in the world. In the nascent digital asset market, reliability and speed cannot be taken for granted. Many exchanges are built by inexperienced teams and are unable to handle sky-rocketing transactions volumes and a plethora of security threats.
Binance claims that it is able to handle 1.4 million transactions per seconds and also boasts itself for having industry-leading security. With exchange hacks being reported almost every week, security remains a major concern. The quality of Binance’s security measures was showcased in a foiled attack in March 2018. During a two minute window, hackers were able to gain access to users funds, but Binance’s risk management system detected the abnormal activity and the attackers were unable to withdraw any funds. In another incident in July 2018, Binance promised to reimburse all user that were affected by this hack.
The BNB Token Model
At launch, 200,000,000 BNB tokens were created and 50% were sold in an initial coin offering (ICO). The two main factors of BNB’s financial success are scarcity and utility in the form of fee discounts and rewards.
All Binance exchange users can opt to pay trading fees in BNB tokens and receive a discount. Initially, this trading fee discount was 50% but has recently decreased to 25% with two more halvings within the next two years. Additionally, active traders that hold a certain amount of BNB tokens can receive further fee discounts. For instance, holders of more than 2,000 BNB with a 30 day trading volume exceeding a value of 10,000 BTC, can receive up to 60% discount on trading fees. Both mechanisms provide an incentive for people to buy and hold BNB and assign a tangible value — the amount of fees saved — to the token.
Furthermore, users can refer new members to grant them further discounts and to receive a fraction of their trading fees. This snowball-like system proved to be a powerful tool in user acquisition.
To achieve scarcity, Binance uses 20% of its quarterly profits to buy back and destroy (“burn”) BNB tokens up until 100 million BNB tokens have been burned. This deflationary supply mechanism naturally increases the value of the token.
After four years, BNB will no longer offer direct fee discounts. However, it is likely that Binance will find new ways to incentivize users to hold BNB. One possible direction is the expansion of BNB to a smart contract platform that would power a decentralized exchange and other services such as ICOs.
Summary
Binance Coin is one of just two digital assets that show a positive performance in 2018. Binance’s solid business model and the simple yet powerful token model helped BNB to stay ahead of the competition. As long as Binance maintains a profitable business, holders of BNB are likely to see a positive price performance.
Disclaimer: The above references an opinion and is for information purposes and educational purposes only. All information contained herein should be independently verified and confirmed. We do not accept any liability for any loss or damage whatsoever caused in reliance upon such information or services. Please be aware of the risks involved with any trading done in any financial market. Do not trade with money that you cannot afford to lose. When in doubt, you should consult a qualified financial adviser before making any investment decisions.
Disclosure: The author holds a small amount of BNB at the time of writing.
Below is a similar chart starting at 01/01/2017.
A few interesting observations:
- Out of the Top 50 digital assets, only 25 even existed in January 2017
- The worst performing digital asset is ZCash with +213% (no investment lost money)
- The highest performer (by far) is Verge with +64,000%
- Bitcoin is the 4th worst performing digital asset
- The performance of all digital assets was so high that a double log scale had to be used
