Published on Feb 21, 2020
Binance Coin (BNB) is a token released by the Binance exchange, which used the token as a fundraising model to bring about its new cryptocurrency exchange. In addition, the coin enables customers to enjoy reduced fees when trading cryptocurrencies that are paired against BNB. 200 million BNB were created in the form of an ERC20 token, with half of them issued via a crowdsale.
Binance is currently the world’s largest cryptocurrency exchange, with over $6 billion in assets traded in an average 24 hour period. Binance’s rise to the top has been swift. Since its launch six months ago, Binance has grown at a rapid rate. Millions of users per week sign up to use the exchange, including 240,000 members last Wednesday alone. Wednesday’s daily record came after Binance lifted a temporary freeze on new member registrations.
Binance is also the name of a cryptocoin (BNB) traded and used on the Binance exchange. Since the ICO six months ago, the value of BNB has risen with the growth of the exchange. BNB is now among the top 30 cryptocurrencies in the world by market cap.
What about Binance makes it so compelling? Why are so many people signing up to use this new exchange? In this article, we’ll dive into those questions. The answers are surprisingly simple. The simplicity of Binance’s business model has been the key to its success so far, and it bodes well for future success.
First, it’s worth understanding the basic mechanics of a currency exchange before we go any further. Solving some technical problems with exchange software is among Binance’s key competitive advantages.
A typical exchange works as a market maker for buy and sell orders. It’s important to note that the exchange itself does not buy and sell your currency when you make an exchange. Instead, the exchange matches you with another user who is willing to buy your asset at the price your asking. This matching of buy/sell orders is the key function of an exchange. When an exchange matches buy/sell orders and completes a trade, it charges a transaction fee to both parties for the service of finding a match. That’s how exchanges make money.
This order matching creates a bottleneck for many cryptocurrency exchanges. If you have more trade requests than your matching software can handle, orders will be delayed. With the popularity of Bitcoin and altcoins right now, users are submitting millions of trade requests per minute on the most popular exchanges. Delayed trades might be the difference between capitalizing on an investment opportunity and missing it.
Binance’s major innovation is their matching engine, capable of 1.4 million trades per second. This makes their trading platform one of the fastest available on the market. As such, many crypto investors have flocked to Binance for its processing speed.
The other critical component of an exchange is liquidity. Liquidity is the amount and frequency with which assets move around the exchange. In order to quickly find a match and complete an order at a competitive price, there needs to be a lot of activity on the orderbook. An exchange with a quiet orderbook is not a good place to invest your money. However, Binance has the busiest orderbook in the world, making it a safe, competitive market for transactions.
Binance Coin can be used to pay for various fees on the platform including exchange, withdrawal and listing fees. For token-holders, this provides an opportunity to enjoy reduced fees compared to those charged at other exchanges, which are usually levied in bitcoin. For the first year, there is a 50% discount rate on trading fees, dropping to 25% in the second year and halving again in each of the subsequent two years.
That is always the main question to ask when exchanges decide to make moves like this. Native exchange-traded currencies which can’t be exchanged anywhere else also make for an interesting discussion. Binance, one of the world’s biggest cryptocurrency exchanges to date, decided to issue 197,192,382 BNB in total, even though only 99,014,000 are in circulation at present. This currency is used to pay expenses on the trading platform. Additionally, Binance offers users a rebate when charges are paid in BNB rather than Bitcoin.
While it sounds convenient to use Binance Coin as a way to pay expenses on the trading platform, the currency is currently valued at over US$16. That seems like quite a steep value for an ERC20 token with only one specific purpose. It’s good to have a currency to pay for most expenses rather than be forced to deduct them from your trading balance. Users who do not use their BNB for this purpose can always sell it to other users of the exchange. Whether or not that is enough to warrant a US$16 valuation per coin is still a bit unclear.
Furthermore, it seems Binance will continue to buy back BNB later this year. Although not too many details have been made public, it is expected there will only be 100 million coins left in total. This seems to indicate the total supply will be cut in half very soon. The purchased coins will be burned, rather than held by the team. It is an interesting plan, but it would also explain the high valuation associated with BNB right now.
Given the current popularity of the Binance exchange, it seems fair to assume that plenty of users rely on BNB to pay for most trading expenses. As its popularity continues to rise, even more people will learn about BNB and its value, and it is unclear if that will spark more interest in this particular currency. So far, it seems the interest in BNB is warranted, although its use cases are still very limited in nature.
Assuming the aforementioned buyback occurs, it is evident there is good reason to be interested in this particular ERC20 token. Since Binance offers a fair amount of cryptocurrencies to trade, settling fees in a completely different currency is an option well worth checking out. Storing the currency can only be done on the exchange itself, which may make it less appealing to some users. It will be very interesting to see what the future holds for Binance and its native currency.
