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Exchange Tokens Explained

As a separate digital asset class, crypto exchange tokens have evolved to serve different functions in the crypto and blockchain ecosystem. A set of features sets them apart from other cryptocurrencies.

What exactly are exchange tokens, and what are the benefits of investing in them? We’ve gathered all you need to know about crypto exchange tokens in this article.

What are Crypto Exchange Tokens?

An exchange token is the native digital asset of a cryptocurrency exchange. Since Binance launched the Binance Coin (BNB) token in 2017, other cryptocurrency exchanges have started issuing their own tokens. They serve different purposes on the platform. Generally speaking, most exchange tokens were initially launched to facilitate the crypto trading process.

If you already own a crypto exchange account, you know that crypto exchanges are the primary platforms that enable people to buy and sell crypto. In addition, crypto exchanges have expanded their services and support advanced options, like staking, margin trading, cold storage, and credit cards. Exchange tokens are another way exchanges can offer their users additional benefits.

You can buy exchange tokens using fiat money and trade like any conventional cryptocurrency. Platform users can also receive exchange tokens in an airdrop or as rewards while using the exchange platform. Let’s look at the most common ways exchanges use native tokens.

1. Crypto exchange tokens serve to increase the native exchange’s liquidity.

Liquidity refers to how easily a crypto token can be converted to fiat currency or another cryptocurrency. A liquid market is stable, and there’re many participants actively trading crypto. Therefore, it’s easier to sell or buy cryptocurrencies when liquidity is high. Likewise, in conditions of low liquidity, the market is characterized by high volatility and frequent price fluctuations.

Cryptocurrency exchanges earn their profits mainly from collecting transaction fees on trades. High-liquidity exchanges that record larger trading volumes generate better revenues. Therefore, crypto exchanges may use their tokens as an incentive to increase liquidity. For instance, some exchanges give tokens as a reward when a user reaches a certain volume threshold or for staking tokens.

2. Exchange tokens as an internal governance mechanism

Some exchange tokens serve to facilitate the platform’s future development in a democratic and decentralized way. For instance, governance tokens are special DeFi tokens that allow holders to influence and shape together the future of a protocol or application. They enable a democratic voting process in which anyone with a certain amount of token can vote on new community proposals.

A good example is Uniswap, which allows UNI holders to vote on upgrading networks and protocols. Some trading platforms even allow users to vote on what should be the next asset to get listed.

3. Exchange tokens serve as incentives to encourage trades on the platform

Exchange tokens are also used to provide fee discounts for traders and users. Typically, this involves users receiving discounts when paying fees for trading cryptocurrencies, whether on a centralized or decentralized exchange.

4. Exchange tokens drive the platform’s credibility

Not all big exchanges have their own tokens. To launch a native token, a crypto exchange must meet certain regulatory criteria. Thus, having its own exchange token can increase the platform’s trustworthiness in the eyes of state regulators and its user base.

A case in point is the Gemini dollar (GUSD), the first fully regulated stablecoin. It combines the benefits of digital currencies with the reliability of the government regulated US currency. 

Exchange Tokens as an Investment

Exchange tokens recorded massive gains in 2021, gradually becoming an attractive investment option in their own right. 

Some consider exchange tokens to be more resilient to crypto market fluctuations than other crypto assets like Bitcoin (BTC), Ether (ETH) and Solana (SOL). During a price crisis, trading volumes on crypto exchanges remain high for a while, thus supporting the value of exchange tokens.

Certain exchanges with native tokens make use of different strategies to influence their price favorably. One example is buybacks, whereby the exchange buys back a certain amount of the tokens and burns them to decrease their supply. Exchanges usually lay down precise buyback plans during the ICO. 

Not every exchange token has to offer revolutionary solutions to be successful. An exchange token’s value is concentrated mainly around the strength of the platform itself. Therefore, if you want to invest in an exchange token, make sure you know how the exchange that issues it is doing. Trading platforms with solid development prospects are the best guarantee that it’s worth investing in their token.

Regulatory changes can easily affect the business of crypto exchanges and with it, their native tokens too. This could be the main source of investment risk when it comes to crypto exchange tokens.  

Major Exchange Tokens in 2022

Binance Coin (BNB)

The Binance centralized exchange launched BNB in 2017 as an ERC-20 compliant token on the Ethereum blockchain. With the launch of its own blockchain in 2019, the Binance Chain, BNB became a utility token. BNB has remained among the strongest exchange coins with a high-ranking market cap.

Huobi Token (HT)

HT is the Huobi exchange’s token used as the main currency on the platform. It became the first exchange token approved by the Japanese Financial Services Agency. HT token holders can use it to purchase monthly VIP status plans to get discounts on transaction fees. It also allows early access to special events on the Huobi exchange and enables rewards in cryptocurrencies listed on the Huobi exchange.

FTX Token (FTT)

FTT is an ERC-20 token that is native to the derivatives exchange of the same name. It has many applications designed to reward the FTX exchange users. FTX features carefully devised benefit schemes for its token, aiming to increase the FTT demand, while limiting its supply in circulation. AN increasing number of traders and investors opt for the token. However, FTT is not listed on exchanges in the United States.

KuCoin Token (KCS)

KCS started out as an ERC-20 token and it still operates on the Ethereum blockchain. However, since 2021, it also has its own EVM-compatible chain called the KuCoin Community Chain (KCC). Built by the KCS community, the public blockchain uses a Proof of Staked Authority (PoSA) consensus algorithm. 

KCS primarily serves token holders as a means of payment on their trading fees. It can also earn you up to 80-percent discounts on the KuKoin platform. Moreover, users can spend KCS on real-world goods and services like computer equipment shopping or accommodation reservations.

OKEx (OKB)

Malta-based crypto exchange OKEx issues the OKB token. It’s another ERC-20 token that uses a proof-of-stake (PoS) consensus. The token provides for up to 40% discount on transactions. It also grants exchange users access to the initial exchange offering (IEO) platform. OKB holders gain voting rights for the next exchange listings and participation in decision-making on the platform.

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