Notes 12/21: Binance’s BNB Token – 1

In recent months, Binance has attempted to position itself as a leader of the crypto ecosystem after FTX’s collapse. But its moves have had the opposite effect and drawn attention to problems at the world’s biggest cryptocurrency exchange by trading volume.

Investors, fearful of another collapse, are pulling out their funds from the exchange, feeding speculation that it might become the next domino to fall. Binance CEO Changpeng Zhao’s (CZ) extensive media tour has also failed to quell investor discontent about its prospects.

Despite the red flags, it is difficult to identify a single source of vulnerability at Binance. The complexity of its organization – its affiliates are registered in fourteen jurisdictions through a web of entities and the exchange claims to have customers across the world – and the absence of a window into its financials means that most analysis about its business is conjectural.

But there are hints in the common elements that make up the exchange’s global span. Among the important ones is BNB – its native token. The token might be one of the two pieces – the other is BUSD – that might induce a catastrophic crash of Binance’s operations.

A Common Thread

Along with Binance USD – its stablecoin, BNB is the thread that links disparate entities in Binance together. It was first offered to investors in 2017 as Binance coin during the exchange’s initial coin offering (ICO). Subsequently, the token was rebranded as BNB after the launch of Binance’s own chain in 2019.

Binance controls BNB’s price by manipulating its supply. The token’s total supply is capped at 200 million. Every quarter, Binance uses 20% of its profits to buy back and burn Binance coins. The idea is to destroy 100 million BNBs to ensure scarcity of the token. As of this writing, there are 159.966 million BNBs in circulation.

Binance Coin’s 2019 name change was accompanied by another more consequential modification. The original ICO whitepaper was scrubbed to remove all mention of profits accruing to investors from holding the token. Since then, Binance CEO CZ claims in public appearances that its properties do not make it eligible to be classified as a security token.

BNB: The Useless Utility Token

Like all crypto coins, including Bitcoin, BNB’s utility is something of a mystery. On its website, Binance has outlined numerous use cases for the BNB token. These range from travel expenses to its use as a payment mechanism for daily transactions.          

But it has failed to provide supporting data or anecdotal evidence for these use cases. There are no publicly available statistics or reports of its use.

On its website, Binance also lists numerous exchanges that support BNB. But they are decentralized finance (DeFi) exchanges that have a fraction of trading volumes for centralized exchanges and hardly any mainstream users.    

The most important utility for the token, this far, comes from its use to conduct transactions within the Binance network. That network is not large. The overwhelming majority of BNB’s trading volumes occur at Binance – a centralized exchange that issues the token and is its biggest holder.

The token offers fee discounts for trading over time, meaning it can be used to trade and profit against the price movement of a variety of coins. After five years, there are no discounts. A cursory glance through the exchange’s trading volumes, however, disproves this claim. The percentage of BNB trading pairs against cryptocurrencies is minuscule, ranging from 0% to 3% for various coins. The biggest trading volumes for BNB are against BUSD and Tether’s U.S. dollar pegged stablecoin USDT.

An Equally Useless Derivatives Complex

The other prominent use case for BNB is in derivatives. BNB tokens offer extraordinary staking rates during a time of hampered liquidity and turmoil in the crypto ecosystem. For example, Binance Earn offers 7.8% APY for BNB tokens.   

Many more derivatives involving BNB exist on the Binance Smart Chain (BSC), which is being positioned as a decentralized alternative to the centralized crypto exchange. It uses staking, like Ethereum, for its operations. A derivatives complex, from synthetic coins to margin loans that offer up to 10 times the leverage, mushroomed around it during the pandemic.   

The Total Value Locked (TVL), an erroneous metric used for measurement in DeFi, in the BNB chain is supposed to have reached a notional peak of $21.75 billion in May 2021. Currently, it is at $4.58 billion.

Even that figure comes with several riders. “Frankly, it [the BNB chain] is a s–tcoin casino,” Andrew Thurman, analyst at Nansen – a blockchain analytics platform, told CoinDesk recently. This means that most of its value is derived from trading of worthless tokens that are assigned random values by speculators. It has also been hacked like most DeFi platforms.     

One could say, then, that the story of BNB’s utility is a myth, in a fashion similar to the myth that was Terra’s UST and FTX’s FTT.

BNB As Security

Given the absence of proper use cases around BNB, it hard to find a reason for its existence. Until one looks at its price and markets.

The token’s price skyrocketed during the pandemic, climbing from $40 in January to more than $631 in May, according to data from Coinmarketcap – a crypto data site owned by Binance. Even with the crypto winter priced in, initial investors, who bought it for 15 cents during the company’s ICO, would still have been rewarded handsomely. This year, it has fallen by slightly more than 50% and, as of this writing, it is trading at $249.05, unchanged from its price a day earlier.

How did BNB’s price register such a sharp increase during the pandemic?

We don’t know. One could chalk it down to speculation. But Binance is well known for faking its volumes. It could be an increase in the token’s utility. But the token is useless, as we have seen earlier. Market maker actions at Binance might provide a clue. But CZ is an investor and shareholder in one of them and refuses to divulge the market maker’s identity.

Meanwhile, Binance’s uses for BNB remains a mystery. Is it used as collateral? CZ says it isn’t. He has lied before. Where is it staked? We don’t know. We do know that the token is supposed to be an important part of Binance’s Secure Asset Fund for Users (SAFU). The exact proportion is not known and the effects of its fluctuating prices in crypto markets on the fund’s composition are also not known.

From Security to Utility  

A BNB investment thesis authored by crypto VC firm Multicoin Capital details the case for putting money into it. According to the paper, investors in the token have a claim on its cash flow because Binance reduces supply by buying back the token from investors. An excel sheet listed the profits accruing to investors from the exercise. Based on statistics from Multicoin, Binance gave back $125 million to investors through its buyback-and-burn program in the first 18 months of its existence.

As Binance moves away from the centralized exchange model, and into the decentralized finance ecosystem with its Binance Smart Chain, BNB is expected to perform a similar regulatory transition away from being a token that is issued by a central authority to one that is controlled by decentralized nodes. The authors liken that transition to one that is like Ethereum’s ether, which was deemed to be “sufficiently decentralized” and escaped classification as a security by an SEC commissioner.

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