Binance Coins (BNB) are the utility tokens issued by cryptocurrency exchange Binance in its July 2017 ICO.

The exchange opened for trading on 14th July 2017 and immediately gained traction.

Since launch, its growth has been astonishing. It is thought to be the fastest profitable unicorn (private company with $1bn+ valuation) in history, achieving a $2bn+ valuation in under half a year.

Investors in the ICO have seen the value of BNB rise in tandem with the value of the company, enjoying a gain of 103x in the coin’s first year of existence.

Today, Binance is one of the largest cryptocurrency exchanges in the world with 10 million user accounts and an average daily trading volume of around $1 billion.

The company is immensely profitable, making a total profit of $340 million in the 9 month period from the launch of the exchange to mid-April 2018.

Profit for mid-April to mid-July will be reported in a few days and is expected to come in at over $100 million for the 3 months.

The Binance ICO

The ICO helped us in so many ways as well; it gave us the initial user base. Even before we started, even before we launched our platform, we had about 25,000 registered users at just the ICO phase. It gave us a lot of popularity and initial user base which is extremely valuable. – Changpeng Zhao (CZ), Binance Founder and CEO

Binance issued BNB as an ERC-20 token on the Ethereum blockchain (the exchange itself is centralized and is not built on Ethereum).

$15 million worth of cryptocurrency was raised to crowdfund the exchange.

The whitepaper outlines the roadmap for BNB and is a clear and easy read.

BNB was launched with a total supply of 200 million BNB tokens. There is no function in the smart contract for creating extra BNB to increase the supply further.

Reddit user aminok explains why so many projects choose to do their ICO’s as ERC-20 Tokens:

Crowdfunding became dramatically easier with Ethereum, because the crowdsale smart contract could automatically issue ERC20 tokens in proportion to the contributions. The tokens would then immediately have liquidity in ERC20 compliant decentralized exchanges or centralized exchanges with rapid onboarding processes for ERC20 compliant tokens.

BNB tokens can be held on the Binance exchange or kept in a separate wallet that has ERC-20 support (such as Trezor or MyEtherWallet).

Total BNB Coin Distribution

100mill+80mill+20mill = A Total Supply of 200 million BNB

50% were sold in the ICO (100 million BNB)

100 million BNB sold for a total of $15 million.

40% went to Binance/The Founding team (80 million BNB)

Address: https://etherscan.io/address/0x00c5e04176d95a286fcce0e68c683ca0bfec8454

A lock up period applies to these coins. After the ICO in July 2017, the founding team had immediate access to 16 million of the 80 million coins. The other 64 million coins are currently frozen.

Another 16 million coins (20% of the total) become unlocked 1 year after the ICO (mid-July 2018).

An additional 20% of the coins are unlocked a year later in mid-July 2019, then mid-July 2020, and finally in July 2021, at which point the coins are fully vested and Binance have access to 80 million BNB.

10% went to private investors (20 million BNB)

Well-known investors that helped get the company started include Roger Ver, Matthew Roszak, and Chandler Guo.

More details about the ICO and the private investors can be found here www.binance.com/ico_review_en.html

At first glance, 2 things stand out to make BNB an interesting token.

1 – DISCOUNT ON TRADING FEES = BNB AS A UTILITY TOKEN

The fee for trades on Binance is 0.1%.

However, BNB holders receive a 50% discount when trading on the platform (paying only 0.05% per trade).

This discount applies to all trades (not just BNB trading pairs). Users wanting the discount just need to buy some BNB and hold it in their Binance account, then fees from trades are taken out of that BNB balance.

This 50% discount is due to be lowered to a 25% discount this month (all things equal, this will increases Binance’s profit and returns more money to BNB holders in the quarterly burns, but has the downside of making BNB less attractive as a utility token).

The whitepaper shows how trading discounts for BNB holders are reduced over time

2 – THE QUARTERLY BURN = BNB AS A DEFLATIONARY ASSET

Every quarter, we will use 20% of our profits to buy back BNB and destroy them, until we buy 50% of all the BNB (100MM) back. All buy-back transactions will be announced on the blockchain. We eventually will destroy 100MM BNB, leaving 100MM BNB remaining. – Binance Whitepaper

The tokens are taken out of circulation and destroyed, permanently reducing the supply. This makes each remaining coin more valuable.

Coin burns are similar to share buybacks performed in the fiat corporate world. They are an indirect way of sharing profit without attracting the regulatory heat that comes with paying dividends directly.

TOTAL BNB COINS BURNED SO FAR

200 million BNB was the total supply in July 2017 when the coins were first issued.

Today the total supply is 194,972,068 BNB. This can be checked here: https://etherscan.io/token/0xb8c77482e45f1f44de1745f52c74426c631bdd52

The difference in the original total supply and today’s total supply is the coins Binance have burned.

200,000,000 – 194,972,068 = 5,027,932 BNB burned to date.

A LOOK BACK AT THE QUARTERLY BURNS SO FAR

1st Burn: 18th OCTOBER 2017

Binance’s Quarterly Profit

Mid July 2017 – Mid October 2017

$7.5 million

Amount Burned = 20% of $7.5 million

986,000 BNB ($1.5 million)

The record of the burn can be checked on the blockchain here:

Burn Txid: https://etherscan.io/tx/0x5c2c458b4af0ed8d3ce822fbae71878de10b8a2405101344456c358e19045463

This video shows CZ burning the coins:

2nd BURN: JANUARY 15th 2018

Binance’s Quarterly Profit

Mid October 2017 – Mid January 2017

$189 million

Amount Burned = 20% of $189 million

1,821,586 BNB ($38 million)

Burn Txid: https://etherscan.io/tx/0x3ebe8fa51909536be4ecae47b0877fa72ec5fd2afda7ae2d829064847757282b

3rd BURN: 15th April 2018

Binance’s Quarterly Profit

Mid January 2018 – Mid April 2018

$145 million

Amount Burned = 20% of $145 million

2,220,314 BNB ($29 million)

Burn Txid: https://etherscan.io/tx/0x15132c07b4fdee0d4c77c2993588270914c1451953f5fa9ee20aa5450f399031

WHEN IS THE NEXT BURN?

Sometime around July 15.

Binance are expected to have made less profit over the last 3 months than when volumes were much higher earlier in the year.

HOW LONG WILL IT TAKE TO BURN 100 MILLION COINS?

As can be seen above, Binance burned about 2 million BNB coins in each of their previous 2 burns.

At this rate, around 8 million BNB would be burned a year, meaning the quarterly burns would continue for another 12 years (until a total of 100 million BNB have been taken off the market).

However, nobody can predict how many BNB coins will be burned in future quarters as it depends on how high Binance’s quarterly profits are and the market price of BNB at the time of the burns.

A CLOSER LOOK AT BINANCE

HQ = Cayman Islands

Bases = Operations base in Malta, Regulatory bases in Bermuda and Jersey.

The company received investment from several VC firms a couple of months after the ICO finished.

Volume & Users

Binance’s user base grew astonishingly fast in December and January at the peak of the crypto mania.

Its record trading day was $10 billion of volume.

The crypto bear market since then has seen volumes fall. Average volume per day on the exchange is now closer to $1 billion.

December 7th 2017 = Binance hits 1 million registered users

December 19th 2017 = 2 million registered users

December 28th 2017 = 3 million registered users

January 10th 2018 = 5 million registered users

240,000 people signed up in just 1 hour on 10th January

January 17th 2018 = 6 million registered users

February 12th 2018 = 7 million registered users

July 6th 2018 = 10 million users

An Increase in Trading Volume Puts Upward Pressure on the BNB Price

Everyone who trades on Binance is buying BNB. * Directly buying BNB to pay trading fees. * Indirectly buying BNB through the buyback program. If I pay trading fees in other currencies, this adds to Binance’s profit. They use 20% of their profit to buyback and burn BNB. – absorbdeal

How did Binance grow so fast?

1 – Superior Trading System (Fast and Reliable)

Binance’s high performance trading system means users can place orders reliably and quickly.

The exchange’s matching engine handled 3.5 billion requests on its record day (40,000 requests per second). Other crypto exchanges would have buckled under this load.

We have a really fast matching engine. We can handle 1.4mill transactions per second. On our highest day we used about 3% of our capacity on the matching engine. We are doing upgrades for that now, because we want to be ready for another 100x increase in volume. – CZ

2 – CZ AND HIS TEAM HAD VAST EXPERIENCE BUILDING TRADING SYSTEMS

CZ explains below that Binance is a 20-year overnight success.

He put in 2 decades of work to build the skills required to capitalize on 2017’s extraordinary demand for crypto trading. During those earlier years he:

Built a system for matching trade orders on the Tokyo Stock Exchange

Was CTO at Bloomberg Tradebook Futures developing trading systems in New York.

Moved to Shanghai to start his own company Fusion Systems building high-frequency trading systems.

CTO at Blockchain.info,

Co-founder and CTO at OKCoin

Founder and CEO of BijieTech, providing systems to exchanges

The other members of his founding-team have similar high-level experience with exchanges and high performance trading engines.

More details about the team and their technical expertise can be found here. Considering their skills in this area, it’s understandable how Binance blew away its outmatched competitors so quickly.

3 – VERY EFFECTIVE MARKETING / REFERRAL CAMPAIGN

BNB coin creates lots of user loyalty. Holders prosper as the exchange grows so they are incentivized to evangelize it and refer new users.

Holders of BNB are entitled to a cut of the trading fees of whoever they get to sign up to the exchange.

Our trading fee is not the 0.1% as advertised. Realistically, it is far lower. If you pay fees with BNB, you get a 50% discount. If you were referred by a friend, your friend gets another 20% (previously 50%) of the remaining fee. Thus, our effective trading fee is around 0.03%, whereas the industry standard looks to be around 0.25%. – CZ

Other Reasons for the Rapid Growth

1 – High Liquidity

This is much more important to people than low trading fees and other things – CZ

2 – Wide Range of Coin Listings

3 – Minimum KYC Requirements

Users can start trading by just providing an e-mail address, no ID required unless daily withdrawals exceed 2 btc.

4 – Low Trading Fees

0.1% is lower than most exchanges. The 50% discount for BNB holders (0.005% fees) has made the exchange very attractive to traders.

BINANCE REVENUE & PROFIT

The future prospects of the BNB price are heavily linked to Binance making lots of profit.

Binance gets most of its profits directly from its exchange, but there are several other ventures that can bring profit to the company (20% of which goes to the BNB token holders).

BNB holders benefit from the growth of all of these revenue sources:

1 – Trading Fees

2 – Listing Fees

There is tremendous demand from ICO projects to be listed on Binance. Some coins pay a listing fee.

Listing fees on top exchanges are currently hundreds of thousands of dollars (surpassing the price of listing fees on the NASDAQ).

3 – Withdrawal Fees

4 – Profits on Cryptocurrencies Held

For most of its history Binance has operated without a bank account (they recently opened one in Malta). This means the company holds and trades the various cryptocurrencies it owns.

5 – Binance Launchpad

https://launchpad.binance.com/

An ICO advisory service that oversees ICO listings for projects on the Binance Launchpad platform.

Binance Launchpad has so far managed the ICO’s of Gifto (now ranked 109th on coinmarketcap) and Bread Wallet (ranked 191st).

6 – Binance Labs

Binance’s incubator invests in early-stage crypto projects. It is a team of 5 investors, headed by Ella Zhang.

Binance Labs plans to launch a $1 billion investment fund.

The fund’s investments will only be given BNB (BNB surged 15% on the announcement).

Binance Labs Investment Portfolio

So far, Binance Labs has invested in:

MobileCoin

https://www.mobilecoin.com/

A cryptocurrency for mobile payments from the creator of Signal.

Binance Labs led the $30 million round.

Oasis Labs

@OasisLabs

“A privacy-first cloud computing [solution] on a blockchain.”

OasisLabs have raised a total of $45 million from investment funds, including Andreessen Horowitz and Binance.

Republic

@joinrepublic

Crowdfunding startup Republic is “a blockchain financing and investment platform”.

Binance Labs led the $12 million funding round.

CertiK

@certikorg

“A formal verification framework to mathematically prove that smart contracts and blockchain ecosystems are bug-free and hacker-resistant.”

Kuaidi Dache

Blockchain-based ride hailing platform, launched by Chen Weixing (billionaire founder of one of China’s biggest ride-hailing apps).

THE FUTURE

The BNB trading fee discount will disappear in 3 year and profits will no longer be burned when supply drops to 100 million BNB (at an unknown date).

These are 2 important incentives to hold BNB, so new use cases will need to be added at some point to be a viable long-term investment.

CZ and the Binance team know this and as large BNB holders are incentivized to make sure the token retains its value.

The whitepaper outlines possible BNB uses beyond the trading discounts and burn. The most anticipated future use case for the BNB coin is the Binance Decentralized Exchange (DEX).

Binance Decentralized Exchange (DEX)

In the future, Binance will build a decentralized exchange, where BNB will be used as one of the key base assets as well as gas to be spent. – Binance Whitepaper, 2017

This was initially expected to be a long term project launching about 4 years after the centralized exchange (which is the same time the trade discounts for BNB expire).

CZ has since declared it a high priority.

Right now, we are working on a decentralized exchange, our Binance Chain. That’s a very high priority for us. It’s a big project and the work is progressing. – CZ, June 14th 2018

This is our mission, we want to promote this freedom [of wealth, investments, and assets]. And once we have this kind of mission other things fall in place, other decisions fall in place very easily. For example, at the beginning we said we want to do margin and futures trading. But we asked ourselves, do those things help spread the freedom? Well they don’t really, they’re just another financial instrument people play with and gamble with, right. So we said we’re going to put that on hold. And then we said, well DEX right, the decentralized exchange, does that help? Yes that does, so we moved that forward. – CZ (at 14 minutes 20)

Binance have a team of internal engineers working on the DEX and recently held the Binance Dexathon coding competition, offering a $1m bounty (paid in BNB) to build a prototype.

The company also encouraged university teams to help, offering a $10,000 grant per qualified team and a chance to join the Binance team.

Decentralized Exchange Coding Competition Binance will host a coding competition with the clear intent of merging the best implementation(s) and/or team(s) into Binance Chain. Goal The objective of this project is to solicit prototypes of a decentralized exchange with a focus on speed and capacity, or more precisely, a dex blockchain that is low-latency and high-throughput. – Binance Dexathon

CZ stated that more than 20 teams competed to build the DEX.

The deadline for the completion of the DEX passed on June 30th, so there should be an announcement from Binance about it soon.

A previous announcement about the DEX spiked the BNB price 25%, so a similar surge could happen again if the news is encouraging.

A Successful DEX Would Create Huge Demand for BNB

Binance Coin (BNB) will be upgraded to exist on its own blockchain mainnet, becoming a native coin. – Binance

Requirements outlined for the Dexathon prototype give us an idea of what the Binance DEX is likely to look like.

DEX Nodes Will Require BNB to be Staked

A decentralized exchange needs nodes to facilitate the trades.

Demand for BNB will increase if BNB is needed to run a node.

Nodes Will Earn BNB Fees From the Decentralized Trades.

Users who wants to trade on Binance Chain’s DEX will have to pay transaction fees in BNB.

BNB Token Creation Fees

“In addition to facilitating the trade of digital assets, the DEX will likely operate as a launchpad for new coins and ICOs…. New token generation will cost a fee, payable in the native coin of the blockchain [BNB].”

When Will the DEX be Ready?

The project is a high priority but is a significant challenge to get right (lots of other projects have tried but none have had much adoption).

Binance will want to dominate against its DEX competitors the same way it did against other centralized exchanges. It doesn’t seem like the kind of company that would be happy to put out a half done, underwhelming product.

In March, CZ was quoted by Bloomberg as saying he expects to launch this year. However, with development only recently underway and significant hurdles still to pass, I wouldn’t be surprised if the project takes much longer.

OTHER DEVELOPMENTS

Futures and Margin Trading

The Binance whitepaper includes futures and margin trading as a feature to be added at some point. BNB is expected to have a role in this, possibly to be used for collateral and interest payments.

Crypto analyst BambouClub anticipates that margin trading will boost Binance’s profit significantly.

Binance’s revenue will get a massive boost when it adds margin trading, as stated in its roadmap. For Schwab, income from margin trading fees and interest has typically been half of trading commission.

SUMMARY OF BULLISH FACTORS

Economics of the Coin

The value of the token is designed to rise in tandem with the value of the company.

The supply of BNB is decreasing (through the quarterly burns).

The demand for BNB has been increasing (because of the success of the exchange).

Increasing demand while simultaneously decreasing supply is a recipe for a price increase.

Competent Team with Vision

“I’m convinced 100% that crypto is the future. I just know it will happen” – CZ

It only took a few months for Binance to become one of the biggest and most profitable crypto companies in the world.

They have delivered everything they said they would so far. The market has lots of confidence in the team and their ideas to keep growing the business and the token.

CZ and the Binance team hold a lot of BNB coins so have their interests aligned with BNB holders. This incentive to increase the price of BNB prevents the coin from being neglected or a conflict of interest between the company and coinholders forming.

Plans for Growth

Lots of revenue streams still to turn on (futures/margin trading, fiat to crypto trading)

Aggressively expanding. Plans to recruit an additional 2,000 employees this year (the customer service department is said to be a priority).

Diversification efforts like Binance Labs and Binance Launchpad could increase profits and return more money to coinholders in the future.

The Decentralized Exchange (Binance Chain)

If successful would be a complete game changer for the value of BNB as the native coin of the DEX.

Regulatory Arbitrage

Binance have put a lot of thought into minimizing the impact of regulation by moving out of hostile jurisdictions like China and Japan and making agreements with the least onerous regulators in the world like Malta, Bermuda, and Jersey.

Competing exchanges in harsher jurisdictions face higher compliance costs (like Coinbase in the US) which put them at a competitive disadvantage.

BNB Utility Outside the Exchange Growing

Binance encourage payments in BNB in their operations and partnerships so dealing with Binance often requires dealing with BNB.

BNB has been implemented as a currency on Uplive (a South Korean live-streaming platform with millions of users) and on Monaco’s crypto debit card.

CZ commented on Twitter “A few exchanges listed BNB, without our involvement whatsoever. They want to attract our users. smart move. Large, targeted user base. It is also validation for BNB (good for us) …. I wonder when will wallets and payment gateway providers realize they can start to tap into this highly targeted and one of the largest user bases available, by simply support BNB”.

Binance Keep Adding Perks for BNB Holders

BNB holders are occasionally rewarded with perks such as token airdrops into their Binance accounts. For example, Blockmason (ranked 370th) was previously gifted to coinholders.

BNB as the “Stable/Safety Coin”

BNB has had a great 2018 so far despite most other coins suffering huge losses in the bear market. It has climbed from 36th on coinmarketcap (BNB price $8.08) at the start of the year to a ranking of 17th today (BNB price $12.39). The market cap of BNB is currently $1.4 billion.

BNB is the best performing coin of the crypto bear market so far. It is down “only” 50% from its all-time high compared to bitcoin which is down 69% (see the rankings at https://athcoinindex.com/). Outperforming Bitcoin in a bull market isn’t that surprising but doing it in a bear market is.

High visibility on coinmarketcap (top 20 coin already) means more investors notice it and investigate.

As a deflating asset with actual utility and adoption, the narrative of BNB as a safe haven compared to riskier coins might catch on. CZ commented on this in his April review, saying “BNB price held up pretty nicely throughout the quarter. Many people used BNB as the “stable/safety coin” during the bear market. This is very comforting to know and such a compliment”.

SUMMARY OF THREATS

1 – Regulation

They are trying to deal with this by avoiding exposure to the US dollar and setting up operations in the least aggressive jurisdictions. The team has moved from China to Hong Kong to Japan, and most recently to Malta, in search of greater freedom.

2 – Hacks

Binance have set up a $10 million bounty reward fund to protect against future attacks.

Binance recently stated that 10% of all trading fees received will be put aside in a cold wallet to cover any loss of funds that may occur from a hack on the exchange.

3 – The DEX Might Underwhelm and Struggle to Gain Adoption

This would make BNB a less attractive investment as it’s the most promising planned feature with potential to add demand and utility to BNB in the future.

4 – Competitors

Massive profitability attracts lots of hungry competitors. Binance will need to stay on top of their game and keep improving the exchange.

5 – The Current Crypto Bear Market Might Last Years

Exchange volumes could fall drastically wiping hundreds of millions off the market cap of BNB.

Conclusion

Binance Coin is somewhat similar to a stock (in that profits are returned to holders) and is also a speculative play on future use cases and a decentralized exchange.

From this perspective, I think its strengths and opportunities outweigh the threats and BNB is a worthwhile part of a crypto-asset investment portfolio.

Follow me on Twitter @leebanfield1