Exchange Tokens 101
There are tons of crypto exchanges across the world, and to distinguish themselves from one another they build their platforms for the specific needs of various types of crypto traders, similar to how AAX uses LSEG Technology's matching engine to merge crypto trading with global finance.
The way a crypto exchange can set itself apart includes its on and off ramps, currency pairs and technological capabilities and, indeed, native exchange tokens.
Crypto exchange tokens have been around for a few years now, and they have proven especially useful for platforms to add value for their customers.
Arguably the best known and most liquid of all exchange tokens is BNB, the native token for the Binance exchange. The BNB token has bootstrapped the exchange’s position in the retail crypto trading space as it ventured into new markets.
In this article, we’ll take a closer look at the utility of exchange tokens, how some exchanges are using it in their business models and the innovation it has spurred on in the industry.
The utility of crypto exchange tokens
While every exchange will use native tokens in different ways, there are typically 3 core use cases for an exchange to implement its own token.
Liquidity is fundamental for an exchange. When new markets are opened, market makers are essential to kickstart liquidity and drive interest from other crypto traders. Native exchange tokens can be used to incentivize market markers for doing exactly that by allocating rewards proportionate to their total trading volume.
On crypto exchanges, traders need to pay fees when executing buy and sell orders. Most exchanges that have issued their own token offer significant discounts to traders who pay for these fees using the native exchange token. The reason for this is threefold: it drives demand for the token, boosts liquidity and fosters customer loyalty.
Borrowing a term from the Ethereum ecosystem, some exchanges also use native tokens as ‘gas’. This means the token is used to pay for executing orders unrelated to trading directly. Think of functions like voting, accessing fundraising activities, early access to IEOs, listing new coins, and so on.
Overview of the most popular exchange tokens
Many exchanges have issued their own native tokens, but only a few have been able to add real value to both their existing customers as well as investors that have bought into the token early on.
At the time of writing, CoinMarketCap reports the following data on the most popular exchange tokens:
|Token||Market Cap||Volume (24H)|
|$3.53 B||$366 M|
|$1.12 B||$275 M|
|$100 M||$8 M|
|$17 M||$12 M|
|$51 M||$2.5 M|
*CoinMarketCap: 23 Feb 2020
CEO of Binance, Changpeng Zhao, has repeatedly said he wants to “gear BNB with as much utility as they can.” In doing so, Binance has not only secured its place in the retail crypto trading market, but in the process the BNB token has gained immense popularity after its launch in 2017 when it raised almost $15 million within 20 days. BNB was made available for trading in September 2019 and has since reached the top of the charts with a market cap of around $3.5 billion.
The supply of the BNB cryptocurrency is limited, capped at 200 million, of which 100 million tokens will be burnt, thereby halving its total supply. The coin is primarily used to pay for trading fees, and to encourage the use of BNB for this Binance offers a 50% discount. Other fees such as those for listing a token on Binance are also paid in BNB.
Additionally, the native exchange token is also the only way investors can participate in the Binance Launchpad fundraising events. This is a platform purpose-built for IEOs (Initial Exchange Offerings), the evolutionary sequel to what was previously known as an ICO where the exchange plays a central role in the new token offering as a way to create a safer environment for the fundraising mechanism. Binance Launchpad has seen a number of successful token sales including Fetch.AI, Celer Network and BitTorrent – all of which has driven huge demand for the BNB token.
Huobi is another leading crypto exchange that at one point was in fact the world’s biggest Bitcoin exchange. It has since lost that position but it still serves crypto traders across more than 130 countries. In 2018, Huobi launched its own native exchange token Huobi Token (HT). The supply of HT is capped at 500 million with a circulating supply of just under 50%, and it is based on the Ethereum blockchain as an ERC20 token.
Traders on the Huobi platform can use HT to enjoy transaction discounts, get early access to important events, receive liquidity buybacks and as a voting tool to decide on the listings of new coins. Interestingly, HT is also used as a security deposit for customers that want to be a certified OTC trader on the Huobi exchange.
Similar to Binance, Huobi also has a fundraising platform for IEOs named Huobi Prime. However, they have a taken a slightly different approach as to the utility of HT on this platform. Investors that want to participate in fundraising events, need to hold a daily average of 500 HT for at least 3 days prior to the event.
KuCoin made its name on the big stage as an exchange that specialized in listing lesser-known and small cap cryptocurrencies which major exchanges refused to list at the time. With their exchange token, they have again taken a different approach to add value for their customers in a way that doesn’t involve discounts. As the name suggests, KuCoin Shares (KCS) is a form of dividend payout scheme for token holders. On a daily basis, 50% of the trading fees KuCoin collects are paid out to KCS token holders.
BiBox is not a major exchange worldwide but does have a significant foothold in Asian markets and trades a solid amount of DAI, the MakerDAO stablecoin pegged to USD. For their native exchange token, they have combined all of the approaches above. Bibox token (BIX) is used to pay for trading fees at a reduced amount, plus token holders receive 20% dividends based on the exchange’s net profit.
Other exchange tokens such as BTMX, OKB, COSS, BEST, CNB, EXM are part of this developing space and while they do not offer something we haven’t already mentioned above, it should be noted that some of these exchange tokens have outperformed BTC in 2019.
Exchange tokens benefit platforms, investors and the crypto industry
Exchange tokens are valuable tools for crypto exchanges to strengthen their business models, differentiate themselves, offer their customers exclusive benefits and by doing so build customer loyalty with a real sense of community.
Traders on these platforms enjoy discounts and, in some cases, collect dividends, while investors that spotted and seized opportunities early on have certainly enjoyed the rapid rise of native exchange tokens.
Finally, the crypto industry at large has seen further innovation driven by exchange tokens considering the success of the various IEO platforms that now exist. ICOs were unregulated with many of them turning out to be scams, and STOs have not yet really taken off yet as comprehensive regulations are still under development. IEOs strike the middle ground and offer a safer environment for fundraising events with the reputation of the exchange tied to the projects it promotes.
That’s a win for everyone as it keeps the industry moving while regulatory frameworks are being put in place.
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