Spotlight on Binance Coin
Binance Coin (BNB) is a cryptocurrency token issued by the Binance exchange. Since its launch in 2017, Binance exchange has grown exponentially to one of the top 3 crypto exchanges by volume (exchangewar.info) and the largest crypto-to-crypto exchange, with around 414 pairs available to trade. It has also been able to rapidly dominate BTC trading (~25% of all BTC trades) and a 24-hour trading volume of $4B. In fact, Binance exchange has performed so well that it is widely deemed as one of the fastest startups to achieve unicorn status (1bn$ in valuation) and be profitable; achieving everything in 6 months since its launch.
This opinion piece explores the mechanisms Binance uses to promote the value of the coin and if they will be effective over the long term.
What is Binance Coin?
Binance Coin, or BNB, runs on the Ethereum blockchain with ERC 20 standards. It was launched by Binance exchange in July 2017 with a strict overall limit of 200 million BNB tokens. 10% went to angel investors, 40% to the founding team (vesting equally over 5 years) and 50% was offered to the public in an ICO. According to the whitepaper, BNB’s main use is to pay fees on the Binance platform, including but not limited to: Exchange fees, Listing fees, Withdrawal fees, any other fees.
It is interesting to explore as we will below the mechanisms that Binance uses to support the value of BNB. As Alex Fork of the Humaniq financial platform puts forth, “Almost every project that raises funds through a token generation event faces the dilemma of guaranteeing a clear, functional and profitable token usage scheme within the project’s ecosystem, and ensuring the growth of the token’s value on crypto exchanges.”
The general approach that Binance uses is to create a disinflationary model with several mechanisms designed to raise the value of the token; driving up demand and driving down supply.
Let us first look into the Demand side mechanisms and then the Supply side mechanisms that promote the value of BNB.
Mechanisms used to promote value of BNB
Demand Side
- A clear utility derived from BNB: Trading Fee Reductions and Referral Bonuses
Firstly, the whitepaper lays out that users get trading fee reductions when they use BNB to pay for fees: in Year 1: 50%; Year 2: 25%; Year 3: 12.5%; Year 4: 6.75%; Year 5 and onward: 0%. We are currently in Year 2 (from July 2018 until June 2019). Clearly, these fee reductions are substantial, even when we extrapolate out to Year 4. In essence, Binance raised money, launched a top-notch product (Binance exchange) and also instantly benefitted its users with a 50% discount. We also note that pre-discount, Binance fees were already lower than crypo-to-crypto exchange competition at 0.1% (Huobi was at 0.2% while OKex was 0.1–0.15%). With a clear utility offered to token holders for use on the exchange, all Binance users should want to hold BNB. By extension, as long as Binance users increase, demand for BNB would also increase.
In addition, in May 2018, Binance also began to offer double referral bonuses (40%) for those who hold at least 500 BNB. With the referral bonuses substantially higher for larger holders of BNB, it also drives demand to accumulate BNB. What is important to note here is that by offering substantial utility to holding BNB on the Binance platform, it helped to create a self-rejuvenating cycle of driving demand which in turn also drives the value of BNB further. The referral incentives also help to create a multiplier effect as holders of BNB want to accumulate more coins and help to build the user base as they aim to get the higher referral bonuses.
2. Other utilities are derived: Building the Binance Community (Voting)
In the use cases front, Binance also conducts an event called “Community Coin of the Month Voting” — an idea derived initially from a suggestion made on their slack channel. Voting is conducted by the Binance user community every month to decide on the “winning” new coin which will be listed on the exchange with zero listing fee. Any Binance user can pay 0.1BNB to cast a vote. It is an innovative way for the community to feel invested in the growth of the platform. That said, since one user can only vote once for a very small cost, this factor is unlikely to drive any huge demand — I see it more like a cherry on top of the icing, rather than the icing itself.
3. Use in decentralized exchange Binance Chain as the native token
This is a potentially very important factor in sustaining — even building — the future value of BNB. Binance’s whitepaper stated simply that Binance would build a decentralized exchange in the future, where BNB will be used as one of the key base assets as well as gas to be spent. CEO Zhang announced in March 2018 that Binance Chain would be launched this year, and in August previewed a demo version. CEO Zhang said that once Binance Chain is live, BNB (based on Ethereum blockchain) will be swapped one-to-one with a new coin based on its own blockchain. On the first dimension, we can perhaps draw a parallel of BNB/Binance Chain and Ether/Ethereum; though Ethereum has a much broader use case than Binance Chain which is singularly focused on being a decentralized exchange for tokens. However, when we look at Ether and Ethereum, we cannot undermine the simple fact that by being the gas for a desirable platform (and growing network) provides a strong basis for a token’s intrinsic value.
Supply Side
Quarterly Coin Burning (Creating Scarcity)
On the supply side, the key mechanism employed is Binance’s commitment to artificially create increasing scarcity of the token — what they refer to as the “repurchasing plan”. Binance will spend 20% of their profits every quarter to repurchase BNB tokens and burn them until 50% or 100million coins in total have been burned. As they lay out in a Binance Academy post3, the Binance coin contract itself has a burn function that can be called by anyone. Thus anyone, at any time, can use this function to destroy any amount of BNB from their wallets (although arguably, no one has any real incentive to do so right now). The Binance team uses this function to burn the required amount of coins every quarter. As all coin burns are recorded on the blockchain, it can be seen by everyone and provides clear evidence that a coin burn actually occurred (this is an important point, which separates action from a rumor). If Binance’s profits increase every quarter the way they have done, coins will be burned at an increasing rate, destroying larger portions of the overall supply. The token burn mechanism is disinflationary, and the fundamental idea is not too different from share buybacks and burning for incumbent businesses, or government disinflationary measures taken on overall money supply. This mechanism works two-pronged: first, the growth of BNB’s value is maintained with increasing scarcity, and second, it encourages HODL behavior with relation to the coin as the long-term price is made attractive and predictably so.
Risks & Considerations for Effectiveness
It is my belief that the BNB model has been well-executed and has indeed achieved Binance’s aim of including mechanisms to promote the value BNB. There are some risks inherent to the model, the largest being the fact that holders of BNB are essentially trusting Binance management to adhere to the coin burn every quarter. Note that the coin burn as outlined in Binance academy is still an initiated action, i.e. the holder of the coin has to call the function burn in order to destroy the coins — thus the quarterly burn is not something programmed in the code of the project. As Hoffman, Wishnick et al argue in their paper “Coin Operated Capitalism”4, more broadly, of the 50 ICOs from 2017, only about 20 percent had code which matched their promises 100 percent of the time, while nearly 60 percent made a least one governance promise that was missing from the code, and 20 percent had two or more mismatches. As CEO Zhang said in an interview on Epicenter, the founding team can destroy all the tokens if they want. Therefore, in some way some leap of faith is required for the investor and there is a huge risk for a loss in investor faith if for some reason (founder forgot/natural disaster/plane crash) they deemed that a coin burn would be missed.
Ultimately, let us not forget that the bedrock that the token rests on is the Binance product itself, and the company’s real strength is that they are delivering one of the best products available in the exchange space right now. The Binance platform can handle 1.4mm transactions per second and has proven to be relatively more resilient to attack. During the one incident it had in July 2018, CEO Zhang made the decision to reimburse all users affected — this went down very well with the market. If this foundation of an excellent product and service is not maintained, it would be very hard to fundamentally drive the value of the BNB. The value of a utility token is always secondarily derived from the value of the product itself. Thus, Binance team would do well to keep innovating, and constantly improving the product especially in a highly competitive crypto exchange space. This is the only way that they can fundamentally support the value, especially since in 5 years’ time, the utility derived from the reduction in trading fees goes away. In some sense, that may be when the true test will come for BNB.
I would like to give thanks to the following resources:
1. https://bitcoinist.com/money-to-burn-why-do-companies-burn-their-tokens/
3. https://www.binance.vision/blockchain/coin-burn.html
4. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3215345
Other additional resources:
· Unchained and Epicenter podcasts with CEO Zhang
· https://medium.com/@BambouClub/a-valuation-calculator-for-binance-coin-af3e18a579fc
· https://medium.com/ironchain-capital/the-bnb-token-model-a-story-of-success-79719fd53375
