This article comes fromChain News ChainNewsThis article comes from
Chain News ChainNews
(ID: chainnewscom), Author: Mohamed Fouda, Compiler: Perry Wang, forwarded with authorization.
The first step in judging whether a coin is a good investment is to understand its goals, mechanics, and market positioning. These are the points I want to discuss in detail.
Platform coins rose in 2017, they are classified as functional coins, and the goal is to bring some feedback to exchange users. For example, these platform tokens can reward market makers who create exchange liquidity, and can also be used to reduce transaction fees for traders, or give them some platform governance authority. Different platforms attach different features. With the success of certain platform coins, people's attention to platform coins has increased greatly.
The platform currency has brought huge profit returns to investors
Binance’s BNB token is a successful example of a platform coin, delivering lucrative returns to its holders. In the embarrassment of the collective bear market of cryptocurrencies, the price of BNB currency has risen sharply in the past few months. This article was published on June 21. The currency price relative to Bitcoin BTC has reached a historical high, and the dollar-denominated price is slightly lower than the historical high. The price chart as of late June shows that for investors who bought 7 months ago, BNB has brought 10 times the return, while for investors who bought at the ICO price less than a year ago, The return has been as high as 105 times.
image description
Binance BNB Price Chart
Platform currency mechanism
The design mechanism of the platform currency is to provide multiple rewards for currency holders. The most common benefit is discounted transaction fees. Binance offers discounts that decrease every year for all users who use BNB to pay fees. Huobi provides tiered discounts for users who use its platform currency HT to pay for handling fees. The discount amount depends on the currency value of the user in the Huobi account, up to 50%. KuCoin returns 50% of the daily transaction fee income to holders of its token KCS.
Another common benefit is to give token holders governance rights and airdrop rights. The exchange allows its platform currency holders to have a say in matters related to the exchange, such as the listing of new coins. In addition, the exchange airdrops platform tokens to users who buy newly listed tokens. This kind of airdrop can not only increase the liquidity of newly listed currencies, but also increase the user base of the platform currency.
In addition to direct benefits to currency holders, the exchange also uses multiple strategies to stimulate the price of platform tokens. The most common strategy is token buybacks. The exchange promises to spend no more than 20% of its operating profits to repurchase platform tokens from users, and destroy the repurchased platform tokens under certain circumstances. Both Binance and KuCoin have pledged to cut their token supply from 200 million to 100 million through a buyback mechanism.
The price of the platform currency is linked to the performance of the exchange
Although the platform currency is not legally defined as the equity of the exchange, the price of the platform currency is obviously linked to the performance of the underlying exchange. BNB’s meteoric rise is a direct result of Binance Exchange’s tremendous success in attracting users. Huobi’s HT platform token price also clearly reflects a similar relationship.
image description
TVEV ratio of Binance and Huobi in 2018 (total market capitalization of platform tokens / 24-hour turnover)
People have tried various methods to quantify the relationship between the price of the platform currency and the turnover of the platform. One of the methods is the strategy of calculating the total market value of platform currency/platform turnover TVEV ratio adopted by Coinfi in its platform currency analysis report. The TVEV parameter can be simply calculated by the total market value of the platform currency / the 24-hour turnover of the platform. Since the TVEV ratio fluctuates within a small range, it can be clearly shown that the price of the platform currency is strongly correlated with the performance of the exchange. The price of the platform currency has risen sharply, and TVEV has also risen accordingly, which is also closely related to the good news of the exchange. A typical example is that after Binance launched a US$1 billion investment fund in June 2018, the BNB platform currency rose sharply.
Another analysis that links the price of the platform currency to the performance of the exchange believes that the price of the BNB platform currency is closely related to the number of visits to the Binance Exchange. One downside of this analysis, though, is that it doesn't take into account other ways of accessing exchanges, such as via mobile apps or API interfaces.
Platform Token Risk
Although the platform currency brings amazing returns to investors, there are still several risks that cannot be ignored.
A big concern for investors is regulatory risk. At present, all platform tokens are sold as functional tokens. Quite a few experts believe that this layer of identity can make them escape the constraints of securities regulatory laws and regulations. But for a number of reasons, platform tokens are the closest thing we can think of to "tokenized stocks" or "tokenized securities".
In fact, KuCoin’s platform token KCS is sold as KuCoin stock. If the platform currency is classified as a security, the procedures for investing in the platform currency will be much more complicated. I personally dare not claim to be an expert in securities regulations. I still think that there are many reasons why platform tokens are very similar to stocks of listed companies.
The platform currency currently plays an important role in the exchange ecosystem. Just by holding the platform currency, you will have unique exclusive benefits such as transaction fee discounts/dividends, etc. This is very similar to dividends on stocks.
The price of the platform currency can be proved to be closely related to the performance of the exchange and the business plan of the exchange: such as adding new business or entering other fields, etc. This relationship is also similar to the close relationship between stock prices and performance of listed companies.
Another factor that may seriously affect the price of the platform currency is a security incident. A security incident of the scale suffered by the Japanese cryptocurrency exchange Coincheck in January 2017 may have plunged related platform coins into the abyss. At that time, hackers stole cryptocurrencies worth about $534 million, or about 3.37 billion yuan, from the exchange. Although several cryptocurrency exchanges were hacked in 2017, large exchanges such as Binance seem to have taken corresponding security measures to prevent such incidents.
looking to the future
The third major risk is sudden changes in the cryptocurrency market. The popularity of cryptocurrency exchanges can have a major impact on platform coins. For example, the Poloniex exchange, which was ranked first in the world less than 18 months ago, currently ranks only 37th in the world in terms of daily turnover. If Binance encounters a similar experience, its platform currency BNB may plummet, and the market will never recover.
looking to the future
Exchange tokens represent an interesting category of tokens. Their design philosophy and mechanics pave the way for more democratized tokenized securities.
