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What are Exchange-Based Tokens?

August 2, 2021

Reading Time: 3 minutes

Cryptocurrency exchanges connect the buyers and sellers of crypto to facilitate cryptocurrency trading. In essence, cryptocurrency exchanges assume the roles of banks and security exchanges in a digitized model to enable digital asset trading.

Traders on such platforms pay fees for the crypto exchange services offered. These payouts become hard to initiate in fiat currencies such as the US dollar or other cryptocurrencies like Bitcoin. This where crypto exchange tokens come in handy.

Crypto exchange tokens ease transactions on cryptocurrency exchanges. This transactional ease becomes possible due to the straightforward ways of payment- a unilateral model. Payments take the form of the cryptocurrency’s exchange native coins.

Let’s dive into the various aspects of cryptocurrency exchange tokens.

What are Exchange-Based Tokens?

Exchange-based tokens are tokens that are native to a cryptocurrency exchange. A cryptocurrency exchange like Binance has the Binance coin (BNB), developed to serve various functions. However, some cryptocurrency exchanges do not have crypto exchange tokens due to one reason or the other. A common explanation is the lack of good enough reasons to launch their tokens after carefully analyzing their business models, which would not benefit from such a move.

Some common exchange-based tokens include, but not limited to:

Binance coin(BNB), CAKE, CRO, OKEx token(OKB), Huobi Token (HT), KuCoin Shares (KCS), BitFirex token (BF), Bitmax token (BTMX), and FTX token.

Why Exchange-Based Tokens?

Cryptocurrency exchange-based tokens primarily provide liquidity to crypto exchanges. Increased liquidity in crypto exchange platforms translates to a large volume of trades. Large trade volumes increase crypto exchange earnings due to the increase in marginal fees charged for transactions carried out within the platforms.

Cryptocurrency exchanges use cryptocurrency exchange-based tokens to lower transaction fees for trades. Traders receive discounted transaction fees when they use the tokens to pay for transaction fees in the place of fiat currencies or other cryptocurrencies.

Crypto exchanges lower fees to offer an incentive to crypto traders on such platforms to maintain their brand loyalty. Also, lower transaction fees have a direct positive effect on the trading volume.

Cryptocurrency exchanges may use exchange-based tokens in the form of governance tokens. Governance tokens are applicable in community-run platforms which require members’  input in the decision-making process.

Member participation in decision-making cut across different elements of the organization or platform. These elements could be, for instance, vote for the generation of new tokens, transfer to a new blockchain, the election of officials, dividend payment, amongst others.

Governance tokens are, however, not commonly used by cryptocurrency exchanges. Only a handful of cryptocurrency exchanges use the governance tokens to run the platforms.

Governance tokens are increasingly becoming relevant in the crypto scene, especially with concerns around turning centralized exchanges into decentralized exchanges. Centralized exchanges such as Binance have their top management or executive solely making decisions without traders. Governance tokens seek to eliminate this monopoly in the decision-making structures of cryptocurrency exchanges. The final result is a wholesomely decentralized crypto industry.

How Exchange Based Tokens Work

Exchange-based tokens may act as governance tokens, lower transaction fees, and provide liquidity for cryptocurrency exchanges. However, these uses are generalized. Most exchange-based tokens work uniquely in their respective platforms, as illustrated below:

  1. Binance Coin (BNB)

Binance exchange token, BNB, lowers transaction fees when Binance users settle their transaction costs with BNB. Conversely, in initial exchange offerings for Binance Launchpad projects, the Binance exchange token (BNB) is the only authorized unit of exchange for the new tokens. Hence, BNB is a must-have, especially for crypto investors eyeing different projects launched on the Binance Launchpad.

  • Huobi Token (HT)

Like BNB, the Huobi exchange launched the Huobi token to reduce trading fees. Huobi token is also used as a security deposit to certify traders on the Chinese platform. In this way, the Huobi token serves as a KYC tool, increasing the overall security of the Huobi platform, investor confidence, and trust.

  • KuCoin Shares (KCS)

The KuCoin exchange awards KCS token holders in the platform with a dividend-style payout system. KuCoin distributes about 50 percent of its earnings from transaction fees to the KCS token holders. The platform does this to offer incentives to members.

  • OKEx Token

The OKEx token, or OKB, the native coin to the crypto exchange OKEx, launched without fundraising or an ICO. OKEx platform gave about 60 percent of OKEx freely to the platform’s users. Contrary to other tokens, OKEx did not develop OKB to pursue monetary gains or liquidity. OKEx launched OKB to smoothen transactions within the OKEx ecosystem and to boost the system’s efficiency.

CONCLUSION

Exchange-based tokens are native tokens to various cryptocurrency exchanges. Some of the tokens’ functions are lowering transaction fees, offering liquidity, and serving as governance tokens on crypto exchanges. Different cryptocurrency exchange tokens serve unique roles in their various platforms. Binance exchange token (BNB), for example, acts as a payment Solution for IEOs for projects launched in the Binance Launchpad.

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