BNB is quickly becoming a coin of systemic importance to crypto finance. Should something happen to it, this will bring the entire crypto ecosystem into the spiral drop. No doubt, the Binance team has achieved great success in the crypto finance world, though most of it was coming out of a magic black box. We wanted to raise a few questions to shed some light on the Binance black box.
Our main findings are:
1) Initially announced use case of ‘fees discount’ is an only marginal contribution to BNB market cap, whereas most of the expected value comes from unproven BNB future use cases
2) Binance business economics is atypical in comparison to more aligned peers among crypto exchanges
3) BNB burn is happening at a slower pace than BNB vesting by the founding team, thus, not decreasing, but increasing overall supply
4) Weak regulatory compliance of Binance helps to move fast, but leaves BNB investors unprotected
Given the great importance of BNB stability to the crypto ecosystem, we would call for the Binance management to provide greater transparency on its operations and business models. This would allow us to inject more trust in the system and accelerate crypto adoption by mainstream finance.
The stellar rise of BNB draws the attention of many crypto investors to this asset. The coin was among the first to offer a unique feature such as lasting trading discounts and the ability to participate in building the BNB future community. A fantastic article by Tim Copeland gives a fiction-like story behind the venture.
However, we observed that there are several disbalances being built over the short life of BNB. The Binance coin has quickly become a coin of systemic importance to crypto finance. Should something happen to it, this will bring the entire crypto ecosystem into the spiral drop. Given how vital this coin is for the global crypto investor's community, BQ Intel had a close look and conduct a series of sense checks:
1) Market cap
2) Business economics versus peer crypto exchanges
3) BNB burn process and its impact on overall supply in circulation
4) Binance regulatory compliance
SENSE CHECK #1 - MARKET CAP
It is essential to understand that holding BNB does not provide any stakes in Binance equity. It is a utility token that was used to finance the Binance operation via ICO. The actual use of BNB is mostly limited to internal use in the Binance platform such as incentivizing a customer to hold BNB and use it to benefit from trading fees reduction.
Binance claims that the 50% trading fee discount offered by the token during Binance’s first year, which has been adjusted to the current 25% rate was the first of many use cases where BNB has driven Binance’s global ecosystem growth. Yet until today the primary use of BNB remains within the Binance platform even though the Binance team claims that BNB “evolved into a widely-used utility token with more than 120 use cases”. A few figures provided show that these use cases are minimal e.g. “On TravelbyBit alone, more than US$700,000 worth flights and hotels were booked between 2018 and 2019” representing less than 0.02% of the BNB in circulation. This shows that BNB has a long journey before really becoming a utility token.
Now, let us go through a few estimates and assumptions:
Assuming a 25% fee discount was built-in into this revenue, it should translate into ‘fee discount value’ of $430M ($1.3B/75% - $1.3B)
If the above is correct (we keep the room of our estimates errors), it will give the following:
Most recent BNB market cap was around $4 billion dollars
BNB actual value coming almost entirely from its discount ability ~10% ($430M)
BNB expected value coming from a broad array of future BNB use cases ~90%
Thus, the initially announced use case of ‘fees discount’ is only a marginal contribution to BNB market cap, whereas most of the expected value comes from unproven BNB future use cases
SENSE CHECK #2 – BINANCE VERSUS PEER CRYPTO EXCHANGES
Unlike its most significant peers, Binance is a newborn who was put on steroids. A stellar growth of alleged profits stretching from $7.5M in Q3 2017 to $194M in Q4 2019 representing a growth of ~2500% in less than two and a half years. However, these profits estimates are extrapolated from the original BNB whitepaper where it was mentioned that 20% of Binance profits would contribute to the BNB burn.
This reference no longer exists in the latest version of the whitepaper (V1.2) which raises the question of how to assess the value of BNB. It creates confusion around Binance profitability and appreciation of BNB. Both project an image of the company's success, yet the lack of disclosure raises multiple questions regarding the company’s growth.
Revenue estimates based on volumes and median fees show that Binance bridged the gap with top market players in less than a year and managed to become the largest crypto exchange by volumes.
The brilliance of Binance was to attract and establish a broad base of customers through coins diversity at the crypto bubble peak. In addition, they have been also been able to educate customers about the crypto industry creating somewhat a sentiment of trust through Binance Academy for example.
If Binance managed to generate such impressive revenue from the start it would imply that substantial investment has been made on technical infrastructure to ensure to robustness of the platform and support such rapid increase of volumes - from $3.9bn in Q3 2017 to $208bn in Q1 2018 - and diversity of coins (+1300 as of Feb. 2020).
This would also mean that marketing spend must have been significant to attract a broad base of customers and build the features such as the Binance academy etc. with all of this wrapped up in a very friendly interface.
This infrastructure cost and cost of customer acquisition (incl. fees discount through BNB payments) would have technically made Binance unprofitable in their early beginnings to build the foundations. But compared to its peers Binance allegedly reached profitability from the start – 90% operating margin in 2017 as there were very few employees and little infrastructure cost and 45%, 45% operating margin in 2018 and 2019- with very little support from external investors compared to its peers who disclosed raised providing therefore estimated of market valuation (i.e. Coinbase, Bitsamp, etc.).
Besides the $15m raised through the ICO in July in Q3 2017, we know very little on how much was raised through alleged investors (i.e. BlackHole capital, Funcity Capital, Limitless Crypto Investment and Vertex Ventures). This smokiness around investors funding put a question mark around Binance profitability, valuation and actual agenda.
SENSE CHECK #3 – BURNING OF BNB TO REDUCE SUPPLY
Binance financed itself in its early beginnings through the ICO of BNB raising an initial amount of $15m in July 2017 – 100M BNB worth. They released 200,000,000 BNB as follows:
The founding team has a BNB vesting plan where they can release 20% each year. This leads to a question of the critical mechanism of BNB burn defined as “Coin burning is the process of permanently removing coins from circulation, reducing the total supply” by Binance.
On the BNB ICO white paper Binance stated “Every quarter, we will destroy BNB based on the trading volume on our crypto-to-crypto platform until we destroy 50% of all the BNB. All transactions will be on the blockchain. We eventually will destroy 100M BNB, leaving 100M BNB remaining”.
Binance explains what the Burn process is but does not disclose the rationale behind, some might think that reducing the supply will increase the value of BNB for holders. But looking at the evidence above the amount to be burned overall is the exact amount held by the Founding Team and Angel investors in the initial release.
Actually, the effect of the burn process on the market is near zero. On the contrary, the founding team and angel investors are releasing their BNBs faster than they burn process increasing therefore increasing significantly the market supply each year (20% of 100 M BNBs as per the vesting period conditions)
We can see that there is no real buyback by the founding team to infuse trust and illustrate their beliefs in BNB as the total BNB in circulation is increasing at a much higher pace than the decrease of the overall market supply, the burn process looks more like a smoke mirror. Furthermore, this steep increase shows that the founding team has little trust in the BNB as they don’t seem to hold on to their BNB shares for a long time after the end of vesting period sequences – effect that we can notice on the graph after the end of the 2nd and 3rd sequences (July 2018 & July 2019)
This allowed Binance to help boost the price of BNB that has been swinging over the last few months between $20 and $30. With a current market cap of $4bn the founding team has probably made more money with the BNB than the Binance platform itself.
SENSE CHECK #4 – BINANCE REGULATORY COMPLIANCE
As Multicoin Capital puts in its article: “ Decentralization and team autonomy is a key ingredient in this strategy. The decentralized nature of Binance’s organization allows team divisions to launch and integrate new products at a rapid pace.”
The decentralization has also an opposite side: the Binance entity doesn’t have a real jurisdiction. It is moving extremely fast in comparison to other top crypto exchanges, but this is mostly happening in unregulated space. Bypassing all the hard work to fully comply with all requirements of Money Services Business (MBS) and BitLicense leaves BNB investors unprotected from the potential misbehavior of company management.
We are not saying that the Binance team has bad intentions, but the governance model is unbalanced and goes unchecked. As per ICO rules of the game, the founding team won’t sell their stake in BNB to an external institutional investor like prominent VC, thus, inviting oversight and supervision (think, a system of checks-and-balances). Instead, they keep it internally and no outsider can guess what is going on.
1) BNB market cap only marginally relies on ‘fee discount’ – the only meaningful use case, whereas most of the BNB value comes from to-be-seen future use cases
2) Binance business economics looks distorted when compared with other crypto exchanges
3) BNB burn is not reducing overall BNB supply, because BNB vesting by the founding team is happening at a faster pace
4) The Binance has unchecked governance and doesn’t provide enough information for checks-and-balances.
Given the great importance of BNB stability to the crypto ecosystem, we would call the Binance management to provide greater transparency on its operations and business models. It only takes a few critical numbers published by Binance to prove us wrong in our estimates and assumptions. This would allow us to inject more trust in the system and accelerate crypto adoption by mainstream finance.