Binance BNB Token Economics Case Study
I'm testing a new format. Newsletters will be a summary of each weekly episode. Let me know if you love or hate it.TLDR below. This is not financial advice.
General Conclusion
Exchange tokens are all the hype right now. There are at least 300 exchanges tokens on CMC. Exchange tokens mainly hold the utility function, and the other functions could include similarity to cash.
Tokens capture value generated from within the ecosystem. The token also makes up the incentive mechanism, so it is part of the economics that we will uncover.
The top exchange token in the space currently, is Binance. So in this episode, we will dive into understanding Binance’s BNB token.
1. Market Design of BNB Token
Main objective of BNB (at least for now): utility token for discounted trading fees. This objective might change in the future, but this is the objective now.
Secondary Objectives
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holding it as a store of value due to its deflationary feature
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trading it with other crypto tokens as a medium of exchange
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spend it on other goods like in-store purchases
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donate to charity
All in all, there are over 31 use-cases of BNB token.
On the business side, Binance can tap into their network to establish partnerships like what Libra is doing.
On the user side, Binance uses the deflationary feature and many use-cases to attract users.
2. Token Monetary Policy and Valuation
Max supply: 200m tokens || Distribution: 50% ICO, 40% team, 10% investors
Monetary policy:
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Hyper deflationary structure, similar to a share buyback
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Current status of the monetary policy: 10% of tokens are burned
Valuation:
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Price-earning ratio suggests it is undervalued
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But exchange tokens are like frequent flyer miles. Its valuation is conditional on Binance’s success. The PE ratio might be undervalued today, but there should be other factors and metrics to consider when valuing the token, more than from just an independent price-point level.
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As much as deflationary mechanism increases value, this is not a guarantee. Burning token is only affecting the supply side.
3. BNB Incentive Mechanism
Financial incentive is one of the pillars in token design. On Binance, each trade incurs a standard fee of 0.1%. Traders can use BNB to pay for trading fees and get a discount.
Using BNB token to pay for trading is also not too costly for the exchange. Sure, it is diluting one of their revenue stream, but the value is going back to their early adopters. Since it is their token that they created from thin air, there is not much to lose for allowing a discount in trading fees with BNB tokens.
BNB also uses staking mechanism as an incentive.
Think of it like a subscription model. I subscribe to the newsletter by locking up EconomicsDesign tokens. It is frozen and cannot be touched. I am not losing out, in fact, it gives me access to all the items of Economics Design.
April 2020 update: Binance blockchain is moving to staking-based consensus mechanism and to also run smart contracts. Gas fees will be paid in BNB. Validators will collect the gas fees from transactions. Validators have to stake BNB before becoming a validator.
What Does this Mean
At the end of the day, is this a good mechanism? Sure, it exists to serve the objective and purpose of the BNB’s role in Binance’s ecosystem. But is it the best system in the world? It is hard to say because deflationary assets have other issues and it might not be suitable for your use-case.
TLDR:
BNB token is a native token of Binance with a utility function. The hyperdeflationary monetary policy is incentivises users to hold the token. Paired with other mechanisms like staking as validator, PE-ratio, 31 other use-cases and more, they add to the value-add of BNB token. This turns into monetary valuation for the token.