Trans-Fee Mining: The Second Wave of Crypto Exchange Tokens
The crypto exchange sector is undergoing a shake-up. And why not? After all, the space has proven to be hugely profitable ever since the world started hearing about blockchain technology benefits and the notion of cryptocurrencies.
- The Genius of Exchange Tokens
- New Crypto Exchanges Face Dilemma
- In Trading Volume, We Trust
- Trans-Fee Mining: Exchange Token 2.0
- Profit-Sharing – the Complement to Trans-Fee Mining
- Asian Exchanges Embrace Trade-Driven Mining
- Can Crypto Exchanges Get FOMO
- We Have No Token…Yet
- Will Trans-Fee Mining Face Regulatory Wrath?
- Binance Founders Scold “Flawed, New Concepts
- Is it the Jig Up?
To understand this new threat that’s seen customers ditch the best cryptocurrency exchanges, we must first explore why exchanges like Binance and Huobi are so dominant.
Why do customers keep coming back?
A lot has to do with the clever concept of native exchange tokens.
The Genius of Exchange Tokens
Indeed, whilst platform security is one thing, it’s no coincidence that the most popular cryptocurrency exchanges are those that offer their own exchange tokens.
Popularized in mid-to-late 2017, this token class has helped centralized crypto exchanges gain millions of loyal customers. Think of the most widely-used exchanges out there. Almost all of them offer a token that’s tied to their platform. There’s Binance Coin (BNB) for Binance, Huobi Token (HT) for Huobi Pro, KuCoin Shares (KCS) for KuCoin. And on its goes.
What do these tokens even do?
How are they worth anything?
Well, the value proposition for purchasing exchange tokens is quite straightforward.
Depending on the exchange, holders can enjoy discounts on trading fees, governance rights, and bonus airdrop. Long-term holding is financially incentivized, also, with token buy-back schemes a popular mechanism that the best cryptocurrency exchange adopt.
New Crypto Exchanges Face Dilemma
Having seen the extreme success that these leading exchanges have enjoyed by offering a native crypto token to their users, a rush of competitors have since flocked to the space. Customer acquisition, however, has proven tough. That is, until a new strategy arose. Here’s the rundown:
Problem: even with a native crypto token, how can a new exchange lure traders and market makers over to their platform? They have no reputation. Nor can they prove the integrity of their cyber-security; something of utmost importance in a sector rife with hackers.
Answer: invent a new way to distribute the platform-native token. Running an initial coin offering (ICO) – like Binance’s 2017 ICO investment round for BNB – simply won’t cut it (remember: why on earth would anyone trust a new crypto exchange?). The tokens need to be distributed in such a way that accelerates perceived reputation.
In Trading Volume, We Trust
When the public look to cryptocurrency exchanges, few things sway sentiment as much as trading volume rankings. Scouring through CoinMarketCap and other similar trackers, crypto investors rely immensely on the 24-hour trade volume rankings to help inform them of how reputable and trustworthy any given exchange is.
And so, if you were a new crypto exchange looking to fast-track your perceived reputability, what better way to distribute your exchange tokens than by simultaneously encouraging trading activity?
Yes, welcome to the whacky world of trans-fee mining.
Trans-Fee Mining: Exchange Token 2.0
Indeed, this innovative mechanism has defined a new wave of crypto exchanges. Whether referred to as trade-driven mining, transaction mining, or trans-fee mining, they all describe a new mechanism of exchange token distribution. Such an invention has elicited heavy backlash from certain influencers of the blockchain and crypto space for reasons we’ll discuss later.
These exchanges have figured out a way to distribute their tokens whilst incentivizing trading volume. Specifically, users’ trading fees are reimbursed in the form of ‘newly-mined’ exchange tokens deemed as being of equivalent value.
So, say you traded 7 bitcoin (BTC) for the day. Assuming the common 0.1% trading fee, the crypto exchange will earn 0.007 BTC. With trans-fee mining, instead of refunding the amount to the trader in bitcoin, exchanges convert this bitcoin to the exchange token at market price. This sum is then deposited into your account, and voila! You are said to have ‘mined’ the exchange’s native token simply by trading on their platform, hence the term: trade-driven mining.
Profit-Sharing – the Complement to Trans-Fee Mining
Many questions arise upon learning of trans-fee mining. Namely, do these exchange tokens serve any purpose? What’s the incentive to hold? Wouldn’t users just convert them back to bitcoin (BTC) or ether (ETH)?
Introducing the incentive (and why trans-fee mining has flourished): profit-sharing. As you’ll see below, basically every cryptocurrency exchange offering transaction mining has a dividend-like mechanism whereby exchange token holders receive a proportionate share of up to all the exchange’s daily fee revenue.
Yes, these exchanges are distributing often 80-100% of the daily trading fee income (including all coin types) to those holding their native token. As an example, say one of these exchanges generated daily transaction fees in the form of BTC, ETH, bitcoin cash (BCH) and litecoin (LTC).
Simply by holding this exchange’s token, users will receive a certain amount (usually 80%) of this daily fee income in the form of BTC, ETH, BCH and LTC proportionately.
Asian Exchanges Embrace Trade-Driven Mining
Despite the trans-fee mining model and dividend distribution scheme attracting strong criticism re: longevity concerns and price/market manipulation risks, it’s failed to curb the rate at which (predominantly Asian) exchanges are launching them.
FCoin, an exchange founded by Zhang Jian – the ex-CTO of Huobi – is seen as the pioneer of trade-driven mining.
FCoin reimburses “100% of the users’ transactions fees incurred from the previous day – in the form of FTs (FCoin Tokens).”  They run a dividend-style scheme where 80% of FCoin’s daily fee revenue is shared proportionately with FT holders. FCoin also launched FCandy (FCoin candy), an asset pool that adheres to what they call a ‘locking-as-mining’ issuance mechanism.
Singapore-headquartered CoinBene begun distributing their native Coni Token (CONI) in late-June 2018. Traders on the CoinBene exchange were reimbursed for their trading fees in the form of CONI, until the predefined total of 50 million CONI was ‘mined’.
Whilst transpiring, CONI holders were incentivized to hold by receiving a proportionate share of CoinBene’s daily trading fees. Promotions and lesser-dividends continued thereafter.
The Hong Kong-based Bit-Z Exchange, as one of the more established players in the crypto exchange space, even chose to launch a native “ecological token” called BZ.
Bit-Z Group committed 50% of the 1.2 billion BZ toward “dividend distribution, through “trading mining.”” In mid-2018, these 600 million BZ were allocated to traders, before the Bit-Z Exchange entered “the BZ ecologically sustainable maintenance phase;” a model quite distinct from competitors.
In mid-July, Hong Kong-based Coinsuper also begun supporting a transaction mining scheme. For their daily profit-sharing regime, Coinsuper distributes 80% of their fee income. Notably, Coinsuper distributes only to those who’ve completed at least one daily trade and hold at least 100 Coinsuper Ecosystem Network (CEN) tokens.
The Bibox-affiliated CoinPark is another exchange to have opted for a trans-fee mining model. Whenever a customer (“miner”) uses CoinPark to trade (“mine”), they receive a 100% rebate in the form of CoinPark Tokens (CPs). CoinPark’s daily dividend-distribution policy begins at 100% of their fee revenue for “users who hold CP in the first 2 weeks,” before reducing to 90%.
Can Crypto Exchanges Get FOMO?
Notably, some extant cryptocurrency exchanges, despite issuing their own tokens in the past, have adapted on-the-fly to begin supporting transacting mining.
One such exchange was CoinEx, a subsidiary of major Chinese bitcoin mining pool ViaBTC. Having already partially distributed their native CoinEx Token (CET) in early 2018, CoinEx introduced a trade-driven mining mechanism months later, along with a long-term dividend allocation plan.
After opening in November 2017, BigONE – having previously issued their BIG (BIG) token –unveiled an alternative platform token in mid-2018. Called ONE (ONE), its creation was launched in tandem with a new “Trade-Mining” section.
We Have No Token…Yet
Just as creatively, BTCC – one of China’s former ‘big three’ cryptocurrency exchanges – rewards users with ‘points’, which function as a proxy for their not-yet-issued BTCC token.
Whilst points are generated not through trade, but by completing tasks (e.g., ID verification, depositing, referrals), BTCC – which relaunched in July 2018 – promises to eventually convert these ‘points’ to BTCC tokens. Given the rampant trend, it wouldn’t at all be surprising to see BTCC support trans-fee mining, too.
Will Trans-Fee Mining Face Regulatory Wrath?
Evidently, trans-fee mining/trade-driven mining/transaction mining – whatever you want to call it – has soared in popularity.
But, will it disappear just as quickly?
Those who believe so highlight that the alternative model is basically a disguised ICO. Whilst there’s nothing wrong with conducting an ICO per se, should these trans-fee mining models be regulated equally, then legal issues may very well await these aforementioned exchanges.
Regulatory concerns only strengthen when you acknowledge the incessant suggestions being made that some of these exchanges are facilitating wash trading. Banned in regulated markets, wash trading occurs when a trader simultaneously sells and buys a financial instrument; artificially bolstering trade volume.
In the case of trade-driven mining models, there exists an incentive to trade back and forth (especially with bots), so as to mine more exchange tokens. Whether this would be legally treated as wash trading is unknown. Certainly, though, the exorbitant volumes recorded by these little-known exchanges has many concerned.
Binance Founders Scold “Flawed, New Concepts”
Two of the most vocal critics of trans-fee mining have been the two co-founders of Binance: Zhao Changpeng and He Yi. So relevant have these new exchanges become that they warranted a paragraph in Zhao’s quarterly recap for April-June 2018.
Noting the “interesting, but flawed, new concepts in the exchange space,” the Binance CEO proceeded to condemn the model – not for the first time – writing:
Similarly, Yi also mocked Binance’s new competitors, sarcastically remarking that “now that people love trans-fee reimbursement, how about [Binance gives] back 200 percent” of its fee revenue.
Whilst the conflicts of interest here are obvious, the Binance founders’ comments deserve at least some contemplation. After all, they’re among a rare group in the crypto and blockchain space to have actually built a solid reputation.
Interestingly, in late-July, Binance launched a ‘Tiered Trading Fee Discount Program’; an added incentive to hold BNB and trade BTC. You wonder whether Binance would’ve even launched such an offering if it hadn’t been for the arrival of these new, controversial competitors.
Is it the Jig Up?
Pleasingly, the chances of everyday investors being lulled into a false sense of security re: trading volume rankings is diminishing. In late-July, CoinMarketCap promised to address the “increasing concern around exchange volumes and rankings.”
Whilst competition is welcome in the nascent crypto exchange space, debate over the long-term viability of this new batch of entrants remains. It will be interesting to see if exchanges supporting trans-fee mining and profit sharing schemes can earn the public’s trust, or whether they’ll always be seen as sketchy.
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DisclaimerThe writer’s views are expressed as a personal opinion and are for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
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