- Jack Purdy on Messari’s blog, an interesting question is posed: Why have exchange-native tokens garnered over $5 billion in worth without having any claim to cash flows
- The question being posed is rather interesting as the introduction of exchange tokens makes it an interesting proposition for the degree of centralization.
- In 2019 alone, the top 5 exchanges burned enough of their native tokens worth nearly $300 million.
In an article published by Jack Purdy on Messari’s blog, an interesting question is posed: Why have exchange-native tokens garnered over $5 billion in worth without having any claim to cash flows, liquidation rights during bankruptcy, no legal obligation to be distributed?
1/ Exchange tokens offer no claim on cash-flow, no liquidation preference, and no legal obligation for…. anything
So why have they accrued over $5 billion?https://t.co/K1QFoCQnii
— Jack Purdy (@jpurd17) February 6, 2020
The question being posed is rather interesting as the introduction of exchange tokens makes it an interesting proposition for the degree of centralization that the exchange exercises.
These native exchange tokens have been offered as a way to raise money for the exchange while offering just a number of utility functions that can be used natively on the exchange (e.g., lowered transaction fees).
Yet without having any real-life utility, these tokens have accrued a very large value over time. This is the question that Purdy poses and tried to answer in his piece. There is some degree of value hidden within exchange tokens in some way or depending on the utility that the exchange provides for the token.
Exchanges that provide trading discounts using for their exchange token holders can be useful to traders if the continued use of the discount outweighs the cost of trading without. Other forms of utility, like the ability to trade Initial Exchange Offerings (IEO’s), are only enabled to those traders who hold the exchange’s native tokens.
Exchanges also make value accumulations by burning some tokens creating some level of value to them regardless of their utility. Exchanges sometimes burn some of their revenue or trading fees to increase value for their native token holders.
The burn increases the shortage of the token on the market hence accruing value. Such burn mechanisms add value to a token than those that don’t practice such a technique. Exchanges put forth a lot of money into such token burns. In 2019 alone, the top 5 exchanges burned enough of their native tokens worth nearly $300 million.
There is also a large number of funds being spent on these token burns. This is also an indicator of commitment to an exchange’s native tokens and its holders. This could be because exchanges are seeing token holders as a new form of stakeholders who are essential to their long term success.
This could lead to a gradual decentralization process, which could lead to exchanges becoming Decentralised Autonomous Organisations (DAOs). This could mean eventual functionality being added to tokens that involve staking and governance rights over the exchange and its protocols.
This adds a new sense of meaning to why native exchange tokens could be accumulating value. There are bound to be regulatory obstacles on the path and other centralized organizations that are simply more functional.
Therefore, until exchanges manage to navigate to that goal, Purdy believes that exchange tokens lie between “equity shares and an empty promise.”