Originally featured on TokenDaily: https://www.tokendaily.co/blog/a-deep-dive-into-binance-coin

What is Binance Coin?

Binance Coin, or BNB, is an ERC20 token tied to Binance, a popular online cryptocurrency exchange. Binance currently leads the world in trading volume with $1.6 billion in 24 hour volume. The exchange also boasts 300 active trading pairs and 6 million users.

Currently, BNB serves as a utility token that enables its owners to pay lower trading fees on Binance. Binance has bigger ambitions for the coin, however, and will allow margin interest to be paid with BNB once margin trading launches. Thinking even bigger, Binance also plans to build a blockchain specialized for decentralized exchanges with BNB presumably being a fuel for the platform.

BNB has been one of the best performers in the recent bear market.

Valuating BNB

BNB is one of the few cryptocurrencies that is easy to value. Its value is directly tied to a significant cash flow generating business, Binance. Most cryptocurrencies do not have this luxury and are much more speculative. So how does one value BNB? You can simply look at Binance’s current trading volume and historical growth rate. Binance is one of the top exchanges out there and has experienced tremendous growth over the last few months. The team has demonstrated that they can execute, and execute well. It’s no small feat to grow an exchange this fast and push aside incumbents like Bittrex and Poloniex.

Demand for BNB comes from three main sources: a desire for lower trading fees, speculation, and coin burns. Binance has a whopping $1.6 billion 24 hour trading volume, the highest trading volume out there among all other exchanges. As such, the demand for lower trading fees is significant. Binance is also conducting a quarterly coin burn. A coin burn is an event where the issuers of a coin burns a portion of total supply. Coin burns usually result in an increase in price, since supply shrinks while demand stays the same. This is especially true if the issuer is buying back coins in order to burn it, which is exactly what Binance is doing. I will hold off on providing a model for valuating BNB as its beyond the scope of this article but the point is, investors have a lot more visibility into the actual valuation of the coin given that its tied directly to an active business.

In total, 200 million BNB were created. These coins were originally used as a fund raising vehicle for Binance. Although not officially investors in the exchange, early owners of BNB were holders of an appreciating asset with an appreciation rate proportional to the growth of the exchange. Binance promised to use 20% of their profits each quarter to buy back BNB until 100 million BNB was burned. So far, two quarters have passed and Binance has bought back and burned 986,000 BNB in the first quarter and 1,821,586 BNB in the second quarter. It’s been almost 3 months from the second quarterly burn and the third burn is just around the corner.

What is Binance?

Binance began as a little known Chinese exchange. The first coins listed on the exchange were Bitcoin, Ethereum, NEO, QTUM, and BNB. Through an aggressive marketing campaign, the implementation of a seemingly lucrative referral system, low fees (0.10% trading fee vs 0.25% for Bittrex and Poloniex), a high performance trading engine (Binance claims that its trading engine can support up to 1,400,000 orders/s), and a very liberal coin listing policy, Binance grew quickly. Today, the exchange has 300 active trading pairs with $1.6 billion in volume and 6 million users.

Binance is a crypto-to-crypto exchange. It avoids dealing with fiat currencies in order to avoid the plethora of regulations that follows a company that holds their users’s fiat in custody. However, Binance recently announced plans to introduce USD trading with its recent relocation to the cryptocurrency-friendly island country, Malta.

Who is Changpeng “CZ” Zhao?

Binance’s name comes from a combination of the words “Binary” and “Finance”. Its founder is Changpeng “CZ” Zhao. CZ has a very unique history. Both of his parents were educators in China that were labelled “pro-bourgeois intellect”. The family was temporarily exiled shortly after CZ was born and they eventually emigrated to Vancouver, Canada, in the late 1980s. As a teenager in a poor family, CZ worked unflattering jobs flipping burgers in McDonald’s and taking overnight shifts in gas stations.

CZ studied Computer Science in Montreal’s famous McGill University. After graduating, he moved to Japan and started out his career building order matching software for the Tokyo Stock Exchange. Then, he built software for futures trading at Bloomberg’s Tradebook. He was promoted three times in less than two years in his stint with Tradebook.

CZ has a deep entrepreneurial drive and in 2005, he quit and moved to Shanghai to start his own company. He learned about Bitcoin in 2013 and began bouncing around early cryptocurrency projects that eventually became huge ventures today. He has assumed prominent positions at both Blockchain.info and OKCoin. Always an entrepreneur, CZ started Binance in 2017. He raised $15 million in an ICO selling BNB tokens.

CZ is a prominent figure on social media, often resorting to Twitter to handle large scale PR events for Binance. For example, when the exchange went down for almost two days in early February, CZ was on point tweeting updates, deftly managing the crisis with 280 characters or less.

It is clear that CZ is a highly capable leader that runs a tight ship with Binance. With CZ at the helm of the company, it is hard not to be bullish on the exchange. However, as skilled as its executive team is, the exchange is hounded by many significant regulatory risks.

Risks

Regulation

The most significant risk for Binance right now is regulation. The exchange is currently in regulatory limbo with a high possibility that countries like the United States, South Korea, and Japan will ban their citizens from trading on the platform. Why would they do so? There could be many reasons these countries’s regulatory agencies could use to justify a banning. As examples, Binance could be considered an unregulated platform for trading securities. A law could be passed that considers the custody of cryptocurrencies the same as the custody of fiat currencies. Trading on Binance could be considered gambling.

The first signs of these risks appeared earlier this year when Japan’s Financial Services Agency (FSA) issued a warning to Binance requesting the exchange to stop operating in Japan until they are registered with the regulator. With the recent, massive hack of the Japanese exchange, CoinCheck, the FSA is looking to impose stricter capital controls on cryptocurrency exchanges operating in the country. With Chinese cryptocurrency regulation still unknown with regards to Hong Kong, which Binance is headquartered in, CZ decided to move the company to the much more cryptocurrency-friendly country in the middle of nowhere, Malta.

In the other side of the world, the United States’s SEC has also ramped up cryptocurrency regulation. The agency declared almost all ICO tokens securities earlier this year. Binance, with their 300 active markets, so happens to trade many many ICO tokens. Besides declaring ICO tokens securities, the SEC has also started to arrest ICO founders that the agency has deemed criminal. Centra was the first victim and their token was traded on Binance. Shortly after arrests of Centra’s founders were made, Binance took down all Centra token markets.

On March 7th, 2018, the SEC released a statement titled, “Statement on Potentially Unlawful Online Platforms for Trading Digital Assets”. In this statement, they warned against “online trading platforms” that traded “tokens offered… in so-called Initial Coin Offerings” that met the definition of a ““security” under federal securities laws”. At this point, it seems like the SEC will eventually butt heads with Binance.

This is perhaps why Binance is keen on launching a decentralized exchange.

Hacks

Binance is a centralized cryptocurrency exchange. Centralized exchanges are vulnerable to hacks. Over the past few years, many cryptocurrency exchanges were hacked with billions of dollars in total stolen. Binance was in fact, one of them (thankfully no funds were lost). The hack happened in early March when hackers phished API keys from a small set of users. The hackers then assumed large positions in a low volume coin and placed sell orders at obscene prices. They then used the compromised accounts to buy the coin up until its price rose to fill the sell orders.

Fortunately, Binance was able to catch the abnormal behaviour quickly and stopped all withdrawals from the exchange. All the illegal trades were eventually reversed.

To be fair, even though this was not an actual hack of the exchange, it was still an example where hackers were able to exploit the centralized nature of the exchange to attempt to steal funds. If Binance did not intervene in time, the attackers would have ran with the money. Who knows how much they could have stolen.

No technical plan for a decentralized exchange

Binance has ambitious plans for BNB that goes far beyond a utility token used for lower trading fees on an exchange. As mentioned above, they plan to build a decentralized exchange on a completely new blockchain with BNB as a native asset, most likely acting as a fuel. Depending on the adoption of this platform, this could tremendously increase the demand for BNB. Not only that, this will also reduce BNB’s inherent risks from being tied to the success of a business. Regulatory authorities can easily shut down a business but it’s not easy to shut down a decentralized exchange.

However, there are huge challenges to implementing a successful decentralized exchange. They include technical challenges (high performance, great UI/UX, sufficiently decentralized) and adoption challenges (competition from many, many existing decentralized exchanges). Today, there are many decentralized exchanges out there and Binance is late to the race. In fact, they recently announced that they still lack a technical plan and have instead, decided to crowdsource the technology by holding a “Dexathon” competition. Participants are expected to submit technical proposals and the prize is $1 million coupled with a job at Binance.

Summary

By association with the top cryptocurrency exchange in the world, BNB is one of the strongest cryptocurrencies out there. However, there are also many risks with holding the coin. The most significant of which is the fact that Binance is in regulatory limbo with many regulatory agencies eyeing the exchange. BNB is inherently tied to the success of Binance as a business, and the business will not be successful if there is a regulatory crackdown. The solution to this is to either comply with tough regulations (not easy), or build a decentralized exchange. Binance has expressed no interest in the former and are instead looking to build a decentralized exchange. However, they are far from realizing one.

Nevertheless, there is much to be said for being the native asset of the top cryptocurrency exchange in the world and the markets have so far reflected that. BNB has been the strongest performer in the recent bear market and it will probably continue to outperform barring anything unexpected.