March 19, 2019

Can Binance cannibalize… we mean decentralize… themselves? ☘️

God bless the Irish, gaming in blockchain, and breaking down BNB

Saint Patrick’s Day is two days behind us... just another 363 days until we can celebrate the Irish being awesome again 🍀.

But crypto is agnostic to celebrations and didn’t take any break to bless the Irish. In this week’s newsletter, we take a look at the announcement of a $100 million fund for blockchain and gaming by Ripple and we also dive into the fundamental analysis report conducted on Binance’s BNB token by Multicoin Capital.

Key Developments

The $100 million blockchain & gaming fund

Ripple has announced a $100 million fund to spur development of gaming applications on the XRP ledger. The fund is part of the Xpring programme, an incubator run by Ripple.

The fund will be overseen by recently registered company Forte which was founded by prominent San-Francisco gaming executives. The fund will target gaming developers who have built games that have achieved over 50,000 daily active users and Forte will decide the developers who get the grants.

The grants will be awarded in XRP but are likely to be converted to USD to pay for necessary costs associated with gaming such as server fees.

What’re our thoughts on this?

Blockchain and gaming is a peculiar combination and kind of misleading. The use case that many envision for blockchain in gaming is not really at all related to the gaming itself.

The use case is associated with developing a market for in-game virtual items such as digital collectables for players. This is a significant market but there are already primary and secondary marketplaces for these items.  

The development of marketplaces operated on blockchain technology seems to be more of an attempt from those who create these marketplaces to increase the revenue they earn than to actually decentralize anything.

For example, the WAX blockchain was launched by one of the largest secondary marketplaces OPSkins. You can see this blockchain here and it is being actively used.

However, they didn’t launch this project out of the good of their heart or to lose the fees that they are making through their original marketplace. Their token is required to make a transaction on the network and a fee is applied to each transaction.

At the moment, both the secondary marketplace and the marketplace operating on the WAX blockchain coexist showing that nothing has really been disrupted. Furthermore, they raised a cool $9.6 million through their ICO.

Back to Ripple and XRP

We can’t see this $100 million fund being much more different. It will likely spur marketplaces to be procured on the XRP ledger so that those who have created it will be able to ream in more fees from transactions.

It will have little of the benefits that public and permissionless blockchain applications are meant to have such as censorship resistance. The #XRPArmy will nonetheless be happy to see more applications built on top of the XRP ledger.

As for Ripple itself, any success on the XRP ledger and for the XRP token is a win for them given that they have 55 billion of the tokens locked up.

Interesting Bits 🤓

Analysing and valuing BNB

Kyle Samani and Tushar Jain from Multicoin Capital issued a report analysing Binance’s utility token BNB. They also appeared on Laura Shin’s podcast Unchained to discuss the report.

The takeaway from the report was that they believe BNB was undervalued at the time the report was written. The price at the time the report was written was $10.06. The current price at the time of writing this newsletter is $15.56.

Moving from centralization to decentralization

The report identified factors that feed into the value of BNB. We will delve into these factors but an interesting thesis of the report and also discussed on the podcast was the idea of Binance moving from centralization to decentralization.

Binance is investing huge resources into making their decentralized exchange a success, offering larger discounts and incentivising liquidity to transition from their centralized exchange. If they can achieve this, they will be effectively cannibalizing their own centralized exchange business.

What is the reason for this?

Binance is foreseeing a decentralized future and are betting big on this. By making the DEX a success, it will be good for the value of BNB, and Binance will benefit from this as they hold large amounts of BNB.

Putting the value and merit of this approach to the side, this is a very interesting progression for a company. While most exchange businesses are becoming increasing entwined with the traditional business landscape (ahem.. Coinbase), the most dominant exchange is taking steps to become an actual decentralized autonomous organization.

What about the value of BNB?

As it stands, there are a number of factors that feed into the value of BNB:

  • Utility as a discount token
  • Utility in other domains
  • The success of the Binance business

A Critique of the Value

First and foremost, BNB was designed as a discount token that can be used to avail of discounted fees on the Binance exchange. The higher amounts of BNB that are held, the greater the discount.

However, to justify the price of BNB solely for this use case would be feasible only to traders who pay enormous fees. Users would need to purchase 50 BNB to avail of a 0.01% difference in fees moving from the initial tier to the first tier.

This means paying over $750 for BNB tokens to avail of a 0.01% difference in fees alone. This kind of investment would only be considered by enormous traders.

However, there are a number of other use cases for the token that feed into the value. The token is accepted by some merchants as payment.

The token also has an increasingly important role in the ecosystem that Binance continues to build. Some examples of how the BNB token is used include:

  • As a payment of salary to Binance employees
  • To avail of greater discounts on the DEX
  • To contribute to campaigns on the Blockchain Charity Foundation (BCF)
  • Holding a certain amount of BNB results in achieving greater referral awards
  • Likely will be required to stake to become a block validator on the DEX when it is fully launched

In our opinion, the role of BNB in the ecosystem that Binance builds will be the most important factor in contributing to its value in the future. Binance is currently completely centralized but if they can successfully build a large and decentralized ecosystem that the BNB token is necessary to operate in, we can see a case where bigger valuations are justified.

However, even in this case, it is likely that the ecosystem will have an element of centralization with the current Binance team likely to hold disproportionate amounts and thereby have a disproportionate say over how the ecosystem evolves.

Presently, we see the greatest driver of value in the BNB token being its claim on a share of Binance’s profit. Every quarter, Binance use 20% of the profits of exchange business to buy back BNB tokens and burn them out of existence.

This process will continue until 100 million of the total 200 million supply will be burned. This model is well thought out to feed into the value of the token.

By reducing the total supply, the token becomes more scarce. With Binance committed to purchasing and burning BNB tokens with 20% of their profits each quarter, the process serves to tie the performance of the Binance’s business with the value of BNB tokens.

This is temporary, however, and will stop when 100 million of the total BNB supply has been burned by Binance. In the near-term, we still view this as being the biggest driver of BNB token value.

That’s a wrap.

“From an earnings standpoint, Binance DEX will not directly increase profitability for Binance, but it will certainly increase the utility of BNB in a big way. That should be good for BNB holders. Binance is also a larger holder of BNB, so we benefit in the same way as all BNB holders. The more people using Binance Chain, the more value is created, or the more successful we all become”

Changpeng Zhao, Binance CEO