In a previous CoinFi research analysis written by our very own Chief Data Scientist Alex Svanevik, we compared various exchange tokens using TVEV ratio, discovering that there is a simple model we could use to assess whether or not an exchange token is priced fairly in relation to other exchange tokens. In this post, we will attempt to value the Binance exchange token (BNB coin) from a cash flow perspective.

The reasons for CoinFi’s fascination with exchange tokens are:

• The utility/token economics are generally well defined, making them easy to understand and value.
• Exchange tokens as a whole (especially Binance) have been widely used, circulated, and battle tested. Several of them have even had a series of buybacks.
• Despite the recent sell-off in crypto, exchange tokens have held up quite well, as shown in the graph below.

As we can see from the above plot, since March 2018, BNB tokens have doubled in value over BTC while HT (Huobi Token) has more than tripled!

For this article, we will focus on valuing BNB coin for three reasons:

1. Out of the exchange tokens, the BNB coin has had the longest history.
2. For the past few months, Binance has consistently been among the exchanges with the largest volume traded and is arguably the largest exchange in existence.
3. Lastly and most importantly, the primary use case for BNB token is very clear – it provides a discount on traded volume. This simple model makes it relatively easy to come up with an accurate valuation. In future blog posts, we may look to estimate the value of other features of various exchange tokens that don’t relate directly to the transaction fee discount.

Below is the basic market data for BNB:

Binance BNB
*June 19 2018
BNB px	$16.53
circulating supply	114,041,290
total supply	194,972,068
circulating $mkt cap	$1,885,102,524
total $mkt cap	$3,222,888,284

The current utility of BNB tokens come as a form of transaction fee discount where you pay in BNB rather than the native currency you trade.

Discounts on transaction fees for holders of BNB are as follows:

Year 1: 50% off

Year 2: 25% off

Year 3: 12.5% off

Year 4: 6.75% off

The definition of what “Year 1” means is not clear on the BNB website, so we decided to find out from Binance directly.

First off, shout out to CS Yuu at Binance support for the swift reply (9 min) – good customer support is always a great sign.

Does BNB Coin Value Go to Zero?

What this means is that by the 5th year of BNB’s existence, the transaction fee discount actually goes to zero!

So unless BNB comes up with additional utility of the token, the value that comes from the transaction fee discount will go to zero, and all that will be left is the value of the token as an exchange currency.

• Keep in mind that about $100 million volume of BNB trades a day, with a good chunk as a form of exchange currency to buy or sell other cryptocurrencies, so even as it currently stands, there would be some residual token value after the discount ends.
• Binance can (and by our estimation will likely) add additional incentives in the future for BNB token holders, in order to compete with some of the incentives other exchange tokens are offering.

Binance also recently added a new feature as of May 18th 2018:

While the above new feature certainly changes token demand, likely having a positive impact on price, we will focus mainly on the transaction fee discount, since it is the most significant token utility and the most straightforward to value.

How We Modeled the Value of BNB Coin

Unlike many token utility models, the BNB coin has a clear fundamental monetary value that we can quantify – the transaction fee that traders save by holding the BNB tokens. We want to know how much this utility is worth.

As a result, we can actually view BNB as a cash flow generating asset, where the cash flow comes in the form of transaction fees saved.

Now let’s consider the following scenario: Suppose someone was to own all of the BNB tokens, how much should they charge to willing traders on Binance?

From this angle, we can view ownership of Binance tokens as a business with predictable cash flows, which will allow us to easily value the token.

First Step: Estimating Volume

First and foremost, we need to estimate the $USD volume traded in order to see how much a company that lends out BNB could possibly make each year.

Keep in mind that Binance as an exchange has been in existence for about one year, so trying to project $USD traded volume years in the future is no easy task, and we’ll need to make a few assumptions:

• For the past several months, Binance has been among the top exchanges. Arguably, it is the #1 exchange in terms of $ value traded and given their current dominance, it seems unlikely they’ll be unseated in the near future.
• Over the last few weeks, Binance has been trading $1.6 billion worth of cryptocurrencies per day. While this volume fluctuates depending on action in the market, it is a good baseline assumption.
• There is certainly a chance that Binance may drop off the radar. If that turns out to be the case, then the exercise of valuing BNB may end up becoming a pointless one. However, this is (at least partially) offset by the fact that we are not putting any growth projections on the total crypto trading market as a whole.

If we assume $1.6 billion trades on Binance everyday, we can estimate the future cash flows of this hypothetical company lending BNB to its customers.

	Binance Transaction Fee	Discount	Daily Volume	Transaction Fee Saved (Daily)	Transaction Fee Saved (Yearly)
Year 2	0.10%	25%	$1,600,000,000	$400,000	$146,000,000
Year 3	0.10%	12.50%	$1,600,000,000	$200,000	$73,000,000
Year 4	0.10%	6.75%	$1,600,000,000	$108,000	$39,420,000
Year 5	0.10%	0%	$1,600,000,000	$0	$0
Sum				$708,000	$258,420,000

• Year 1 – which has a 50% discount – is omitted from this model since BNB tokens are coming towards their 11th month of existence.
• We use 0% interest to discount for first estimation as current interest rate at around 2% is still historically quite low and will not have a big effect on our conclusion.
• Total sum of cash flow up to Year 4 is $258 million.

Based on this model, the utility of BNB token’s “transaction fee discount” is potentially worth $258 million.

Some of you may point out that this model is flawed because not everyone efficiently buys the exact amount of BNB to optimize their trading costs. This point becomes irrelevant since the value of the company holding BNB coin would depend on what the optimal lending is, rather than who has decided to be efficient on buying an exact number of BNB tokens for their trading.

Furthermore, some token holders may hold more than is necessary, which would offset the traders that forget to hold BNB.

Circulating Supply or Total Supply?

With this $258 million dollar value assigned to the token’s “transaction fee discount” utility, we would like to see what portion of the token price is due to this feature.

Here we use circulating supply. This differs from our exchange token analysis on TVEV ratio where we used total supply to account for the large discrepancies in % token circulation.

For the purpose of trying to figure out what percentage of the current market cap is accounted for by the transaction fee discount utility, we need to consider the total amount of tokens that are available for traders to use in order to receive that discount. This happens to be the circulating supply.

BNB Coin Price	$16.53
Circulating supply	114,041,290
Circulating Market Cap	$1,885,102,524
Transaction Fee discount feature value	$258,420,000
Transaction fee portion %	13.71%

With a circulating market cap of $1.89 billion, the “transaction fee discount” utility of the BNB token accounts for roughly 14% of the price of the token.

So Where Did the Other 86% Go?

• Binance uses 20% of their profit to buyback and burn BNB. Like a share buyback program, this adds additional value to the price of the coin which we have not accounted for. Imagine the company that lends out BNB, they can eventually sell back the idle BNB at a predetermined value.
• We haven’t considered growth into the model. But with a premium price, there is likely some growth priced in, and as crypto currencies become mainstream Binance is poised to reap the benefits.
• BNB also has other utilities such as the 2x referral fee we pointed out earlier in the article, and also recently added a feature that allows amplification of voting power for listing for holders of BNB, which justifies additional premium on the price.
• Binance hinted earlier in the year that their goal was to eventually work towards becoming a decentralized exchange and some have speculated that BNB may be used as a form of gas to power the network – certainly an exciting development worth a premium price.
• Additional features may be added which would likely adjust the token economics and token value. Basically, the transaction fee discount has so far served as a way of attracting crypto traders to sign up for their exchange.
• We pointed out earlier in the article, BNB pairs trade for decent volume, and more and more traders are using it as a form of exchange currency to buy and sell other cryptocurrencies given it an intrinsic value as a form of exchange currency.

One Simple Change Binance Could Make to 2X the Token Value

What happens if Binance were to extend the transaction fee discount of 25% to all BNB coin holders in perpetuity? Let’s examine how that might affect the price on BNB.

From our previous table (Year 2 figure which uses 25% transaction fee discount), it would mean $146 million of potential annual transaction costs saved by traders or $146 million in annual cash flow for our hypothetical BNB lending company.

Given that this is potential cash in perpetuity, we can use the perpetuity formula used to calculate a financial contract that pays never ending annual dividends to its owners to value the market cap.

• We use the US 10 year rate at 3.1%
• Value of perpetuity = $146 mil / 3.1% = $4.709 billion
• Using circulating supply of 114,041,290, this implies a per token price of $41.3, nearly three times the current price just on the transaction fee discount feature alone!
• This is not even taking into account future features which could lead to an even higher valuation, or the burn feature and growth projections.

While such an announcement would be great news for traders in Binance and hodlers of BNB, why would Binance want to do this? Technically, they would be forfeiting $146 million of annual revenues a year – definitely a non-trivial number, especially for a company that will likely continue to face stiff competition in the future.

However, the benefits potentially outweigh the costs for Binance as a company:

• Binance and its founders hold a significant portion of BNB coins so their incentive is aligned with hodlers out there.
• Extending discounts beyond year 4 would ensure that BNB coin stays relevant and continues to trade and circulate. It may solidify BNB even more as an exchange currency for buying other cryptocurrencies.
• If more people hold and trade BNB, it would lead to increased circulation on BNB coin which would have an upward spiraling effect on the coin price.
• They will continue to be among the cheapest among the major exchanges, and if the market grows, their share of the total revenue pie will also grow.

So in short, it is a win-win for all sides.