How Asian Exchanges And Investors Are Making Huge Profits Through Trade-Driven Mining
In my article on Exchange Tokens, I discussed how exchanges like Binance and Huobi Pro have started a new trend in crypto-exchanges through the introduction of exchange tokens. Such tokens allow investors and traders to take profit from all exchange activity. So far, investment in such tokens have been highly profitable with a hundredfold ROI; e.g Binance BNB token.
Following this model, multiple exchanges in Asia introduced their own native exchange tokens. They are changing how these tokens are distributed and used to attract traders and market makers. A new interesting distribution approach is the trade-driven mining or trans-free mining. In this approach, the exchange token is distributed to users based on their trading volume. Exchanges calculate the daily trading fees for each coin, convert the fees to the exchange token at market price and deposit the tokens to traders according to their trading volume. Trade-driven mining allows traders to effectively have zero-fee trades. The question here becomes: How would exchanges make money if they are giving back their trading fees?
The answer here is simple, profit is made through the valuation of their native exchange token. The conversion of trading fees to the native exchange token creates a large buy demand pushing the token price higher. Meanwhile, from a trader perspective, the trader is getting these token for free. For traders, a trading fee is a loss inherent in using any exchange. However, in trade-driven mining, a trader gets tokens to reimburse this trading-fee loss. The trader can immediately sell these tokens to BTC, ETH or tether or can keep them for a while as long as their price is increasing.
Reportedly, the first exchange to implement such an approach is the new Chinese exchange FCoinOffical. Since then, other older exchanges have started to roll their implementation of this approach. CoinEx, an exchange affiliated with ViaBTC mining pool, has started to use trade-driven mining using their native token (CET). The CET token was issued in February 2018 as an ERC20 token with a fixed supply of 10 billion tokens. The exchange team initially held 50% of the tokens. While the rest is planned to be distributed to exchange users as airdrops and rewards. On June 20, 2018, the exchange announced its plans to implement trade-driven mining along with dividend distribution to all CET token holders. This caused a huge rally in the token price. The token price jumped from around 1 cent to 5 cents in one day. With the program start on July 1st, investors rushed to buy CET to get daily dividends (80% of the exchange trading fees) causing another significant jump in the CET token price to around 15c. If you do the simple math, the CoinEx team CET stake has increased by $700M in value in less than 15 days.
The other major advantage of trade-driven mining is that it attracts traders and market makers to the exchange. CoinEx was ranked around the 25th position by trading volume. On July 3rd, a few days after the start of trade-driven mining, CoinEx jumped to the first position with a 24H trading volume around $2 Billion. A similar observation was made about Fcoin exchange when they started their mining program. Due to the success of this trade-driven mining in attracting trading volume, it was adopted by other exchanges like CoinBene and Bit-Z. In addition, the famous exchange BTCC, which halted trading because of China’s ban of cryptocurrency trading in 2017, is considering a similar approach after their relaunching. Currently, BTCC is awarding points to their users that would be exchanged later to the exchange native token.
Trade-driven mining is one of the most recent innovative ways to attract traders and market makers. It essentially converts crypto-exchanges into token projects where the main source of revenue is the token price. However, in the exchange token case, the token price and the exchange popularity and activity is continuously interacting. While this approach has proved to be successful in the short term, it is yet to see how these exchange token projects would perform in the long term.
In conclusion, as crypto-exchanges continue to be one of the most profitable projects in the space, competition for a bigger user base and a larger trading volume would grow leading to more innovation and new incentive models.
I would like to thank Imran Khan for his help with this article.
Disclaimer: this article is only for informational purposes. It is not intended or can be considered as an investment advice in any way.