Exchange coins are in-house tokens some of the newer crypto exchanges issue to their users. Holding these tokens gives users access to reduced fees, regular profit shares and other benefits. Our Exchange Coins 101 guide will explain how these tokens work and introduce you to some of the most popular exchange coins.
Exchange Coins Explained
Like many other companies in the crypto space, exchanges issue tokens as a fundraising strategy. Binance, for example, raised $15 million in its mid-2017 initial coin offering (ICO). However, the value of exchange coins goes much further than that by helping the exchange run more smoothly and giving token holders extra benefits.
Although the details vary from company to company, exchange coins usually serve a utility function within the exchanges’ ecosystems. The most common use is as a payment option for the various fees an exchange charges. Trading fees, deposit and withdrawal fees, listing fees can all be paid using the in-house token rather than fiat or another cryptocurrency.
Some exchanges give token holders voting rights for certain decisions. This usually takes the form of voting rounds for new coin listings. The exchange’s listing review committee presents the community with a pre-screened slate of new coins that applied for a listing. After the token-holders cast their votes, the top vote-getters get fast-tracked onto the exchange.
As exchanges shift to fully-decentralized business models, the tokens will take on a more formal governance role. Token-holders will have the right to vote on budgeting, development and other decisions.
Owners of exchange coins receive more immediate and financially rewarding benefits. The most common benefits are the discounts token-holders receive for using the coins to pay trading fees. KuCoins has a sliding scale that reduces the fees by anywhere from 1% to 30%. Binance cuts trading fees in half during a user’s first year with the exchange and then gradually reduces the discount over time.
Owners of exchange coins may also get preferred access to contests and airdrops. Teams that launch their ICOs on the exchange will often distribute their tokens in airdrops to the exchange’s largest holders of its in-house coin. This doesn’t mean it’s reserved for an exclusive elite. Binance has airdropped tokens to the 500,000 largest holders of its BNB exchange coin.
All of the exchanges we will look at in this guide “burn” a certain number of tokens every quarter to contract the overall coin supply. Burning is the digital equivalent of lighting a stack of cash on fire. The exchange transfers the tokens to an address that has no recoverable keys. Once the coins go in, they are untouchable.
Burning the tokens takes them permanently out of circulation. By contracting the token supply, the exchange creates upward pressure on its exchange coin’s price. Where bitcoin’s price versus the US dollar has dropped 64% from its peak last year, Binance’s BNB has only fallen 39% due, in part, to the exchange’s burning policies.
Trading and bonuses
Exchanges will often use their tokens as a base market, pairing the exchange token with other cryptocurrencies the exchange lists. Users can trade back-and-forth just as they would any other cryptocurrency.
The trading function makes it easier for users to buy the exchange coin. You typically won’t find these in-house coins traded on other exchanges. Having exchange coin trading pairs lets users buy the coins with whatever cryptocurrencies they happen to own. Sophisticated traders can also exploit arbitrage scenarios to profit on the disconnects between the trading-pair prices.
Another financial benefit that some exchanges offer is the “bonus” they pay to customers who own the exchange coin. KuCoin, for example, uses half of the trading fees it generates to redistribute its KCS in-house token to KCS-holders.
These financial benefits, however, expose the exchanges to more regulatory risk. “Dividend” is another word for bonus which brings the token very close to being a security. This is one of the reasons many of the exchanges on our list don’t allow Americans to join. Selling their exchange coins to Americans would subject them to regulation by the US Commodity Futures Trading Commission and the Securities & Exchange Commission.
Popular Exchange Coins
More than 60 cryptocurrency exchanges have their own exchange coin. Here’s a quick look at some of the largest or more interesting implementations out there.
Binance went from its launch in mid-2017 to the top of the exchange charts in just a few months. The shifting sands of crypto regulations forced Binance to move from China to Japan and then to Hong Kong before the exchange landed in its permanent home of Malta.
The Binance Coin (BNB) is the exchange’s ERC-20 in-house token. Binance issued 100 million tokens during the 2017 ICO and is distributing another 100 million BNB for a total initial supply of 200 million BNB.
The entire Binance ecosystem uses the BNB for various utility functions. Eventually, Binance will migrate the BNB off of the Ethereum blockchain and onto its future public blockchain, Binance Chain.
Projects placing their ICOs through Binance can airdrop their tokens to the largest BNB holders. Blockmason, for example, distributed 1,500,000 of its BCPT token to the 500,000 Binance accounts with the largest BNB balances.
Binance uses BNB to fund other competitions and giveaways. The Binance API Competition, for example, gave away 8,000 BNB to developers with the most interesting implementations of the exchange’s application programming interface.
After an unsuccessful hacking attempt, Binance funded a bounty that would go to anyone whose information lead to the arrest of the hackers. The $250,000 reward would be paid in BNB. Binance set aside another $10,000,000 worth of BNB to fund future bounties.
The Coin of the Month program posts a list of five projects wanting to be listed on the exchange. BNB-holders can vote for which one makes onto the exchange. To sweeten the pot, Binance charges everyone who votes 0.1 BNB to fund a prize pool. The pool gets split among 500 randomly-chosen voters.
You can use the BNB to pay the fees on your trades. Doing so could subject you to higher exchange rate costs if the crypto you receive does not have a BNB trading pair. Binance will calculate an effective exchange rate based on the bitcoin exchange rate with BNB and with your new coin.
Binance also gives you a significant discount when you pay your trading fees with BNB. The discount is 50% for the first year you trade on the exchange. Binance cuts the discount in half every year after that until your fifth anniversary when Binance eliminates the discount entirely.
For small volume traders, the discounts bring the exchange’s flat 0.1% trading fee down to 0.05% during the first year. Large BNB-holders also get access to Binance’s maker-taker fee schedule. For example, people who hold between 2,000 and 3,500 BNB get the same discounts as people who conduct between 10,000 and 20,000 BTC worth of trades every 30 days.
Each quarter, Binance uses 20% of its quarterly profits to burn tokens out of circulation with a final token supply target of 100 million BNB. In the quarter ending June 30, 2018, Binance burned 2.5 million BNB worth $32.7 million.
Trading and bonuses
BNB is the base market for trading in 75 cryptocurrencies. This is about half of the trading pairs listed in Binance’s bitcoin base market.
Binance also lets you convert dust into BNB. Dust is the extremely small balances that inevitably remain as you trade between various coins. It’s annoying because the balances are usually too small to trade or withdraw. Binance lets you do an instant conversion of this crypto dust into BNB.
Binance does not pay bonuses to its BNB-holders.
The OKB is OKEx’s in-house token. The planned 1 billion OKB issuance is proceeding in stages. 100 million tokens went to the OK Blockchain Foundation with a 3-year lock-up period. Another 100 million OKB went to early investors with a 2-year lock-up period. 200 million OKB have been set aside for employee incentive programs, but the annual distribution is capped at 20 million tokens.
The remaining 600 million OKB goes to the public. Half of that has already been distributed in 2018. 50 million were given away as part of a “red packet” Chinese New Year campaign. OKEx is distributing the remaining 250 million through its customer loyalty programs. OKEx will give away the final 300 million tokens — for free — to OKEx users in 2020.
OKEx lets the community participate in the exchange’s listing process. The exchange’s review committee does an initial screening to identify worthy applicants. Prime Investors, who have 500,000 OKB locked up in escrow, then get to review and endorse the candidates.
Finally, the broader population of OKB-holders vote to decide which coins OKEx will add to its listing. The first voting round, which concluded in mid-2018, added CyberVein, Asch and Origin Sport.
Other areas of the OKEx ecosystem where the OKB comes into play include merchant relationships, third-party integration and the creation of advanced financial instruments.
OKEx doles out OKB as part of its marketing efforts. When the exchange revamped its website, for example, anyone who tweeted about the new design had a chance to win 10 OKB.
OKEx does not discount its trading fees unless you trade on the OKB base market, in which case all trades are fee-free.
OKEx does not burn its tokens. The supply of OKB will continue to expand until all 1 billion tokens have been distributed.
Trading and bonuses
The reason OKB holders don’t get a trading fee discount is because they get a “Happy Friday” every week. OKEx takes half of the service fees it collects each week and distributes them to OKB holders. The week ending September 14, for example, anyone who held more than 10,000 OKB received 0.00848063 BTC, roughly $54.
The exchange’s OKB base market has 33 trading pairs. By comparison, the bitcoin base market has 147 trading pairs.
Bibox distributed 500 million exchange coins during its ICO. 50 million BIX went to the exchange’s angel investors. Another 175 million BIX went to the founding team. The lock-up period gradually phases out over the course of 4 years. The remaining 275 million BIX went to the public during the ICO.
People who hold at least 200 BIX can vote on new coin listings. The exchange’s review committee first screens the applications to create a list of 15 candidates. The top vote-getters join Bibox’s listing within 7 business days. A recent voting round brought AC3, TrustNote and Refereum to the exchange.
There do not appear to be any other benefits for BIX holders.
At launch Bibox’s 50% discount for BIX holders was only supposed to apply during their first year trading on the exchange. Like Binance, Bibox planned to cuts the discount in half until the user’s fifth anniversary when the discount would go away.
In mid-2018, however, Bibox changed the program to a fixed 50% discount.
People who hold more than 60,000 BIX can get the same fee discounts as market makers. Depending on their daily trading volume, fees can go down to zero.
Bibox takes 25% of its net profit each quarter and uses it to buy BIX to burn. The most recent buyback burned more than 2 million BIX.
Trading and bonuses
The BIX Incentive Reward program distributes 45% of each week’s trading fees to BIX holders who completed at least one trade that week. To date, more than 10 million BIX.
Bibox’s BIX base market only has 26 trading pairs. The bitcoin base market, on the other hand, has 73 trading pairs.
Singapore-based KuCoin’s ICO distributed a total of 200 million KCS. 70 million of these tokens went to the founders, 30 million to angel investors and 100 million to the public. The one-year lock-up period was supposed to end September 2018, but all of the pre-sale investors agreed to extend the lock-up period by another year.
As with other exchanges, KuCoin lets KCS holders vote on the new tokens to list. They can vote up to 50 times at a cost of 0.5 KCS per vote. The winning project gets a free listing.
KuCoin is still rolling out its benefits programs. The white paper indicates that holders of large KCS balances may get premium services like individual investment consultation and fast-tracked customer service.
KCS-holders don’t have to pay the full trading fee, but KuCoin’s discount program is less generous than other exchanges. Discounts on trading fees increase by 1% for every 1000 KCS held. Someone who holds 13,900 KCS will get their fees lowered by 13%. KuCoin caps the discount at 30%.
KuCoin uses at least 10% of its net quarterly profit to burn KCS. In the quarter ending June 30, 2018, KuCoin burned 396,211 KCS, bringing the total supply of KCS down to 180,334,365 KCS. The buy-backs will continue until the supply of KCS declines to 100 million.
Trading and bonuses
Every day KuCoin sends a bonus payment for users who hold at least 6 KCS. The exchange uses 50% of the trading fees it collected the previous day to buy KCS. The tokens get distributed to users’ accounts based on how many KCS they hold.
While the bitcoin base market has more than 180 trading pairs, the KCS base market only has 8 trading pairs.
Many of the exchanges that launched in 2017 and 2018 adopted the exchange coin business model. The tokens provide a fundraising platform and create stronger communities by giving users financial incentives to stay in the exchange.
The clear utility functions, bonus programs, and the token burning policies provide upward pressure on the price of these exchange coins which makes them attractive investment options. However, those popular features could cross the line for securities regulators and make them a tough sell in the US and other countries.