Notable

Nothing

Exchange tokens are issued by cryptocurrency exchanges such as Binance, Kucoin, and FTX, entitling holders to various incentives, benefits, or perks within the cryptocurrency exchange ecosystem. Examples of such incentives include trading fee reductions, rebates, and early access to token sales hosted on the platform, known as Initial Exchange Offerings (IEOs).
These tokens have the potential to generate significant value. It’s important to stress that this value is not derived from selling shares or issuing loans but rather from exposing the token’s worth to exchange users and creating some buzz through announcements and a few big speeches. Exchange tokens also improve an exchange’s liquidity by giving the platform more dry powder to call on when markets get tight.
Exchange tokens function similarly to other cryptocurrency tokens. They can be traded on secondary markets or held for speculative purposes. Notable examples of exchange tokens include <a style="color: #0000ff;" href="https://coinmarketcap.com/view/centralized-exchange/" rel="noopener noreferrer nofollow">FTX’s FTT, Binance’s BNB, Huobi’s HT, and WazirX’s WRX</a>.&nbsp;
It’s crucial to note that exchange tokens are not equivalent to corporate shares and do not often grant governance rights over the exchange. However, they often exhibit behavior similar to equity markets as an exchange token’s value is largely determined by the belief that the exchange will be successful, leading to increased demand for the exchange token as the platform’s activity grows.
Each exchange token has its unique issuance schedule and tokenomics. Typically, the exchange’s team reserves a substantial amount, releasing it gradually to users and the trading community to stimulate platform growth.&nbsp;
Many exchange tokens are <a style="color: #0000ff;" href="https://defi-planet.com/2022/10/inflationary-and-deflationary-cryptocurrencies-the-most-important-differences-explained/" rel="noopener noreferrer nofollow">deflationary</a>; for instance, FTX regularly burned FTT tokens equivalent to a third of the weekly revenue, as did Binance with its BNB token issued on the BNB Chain. This demonstrates that exchanges have full control over their exchange tokens, safeguarding their value, but it also poses the risk of misuse. CoinDesk <a style="color: #0000ff;" href="https://www.coindesk.com/business/2022/11/02/divisions-in-sam-bankman-frieds-crypto-empire-blur-on-his-trading-titan-alamedas-balance-sheet/?_gl=1*8to8ht*_up*MQ..*_ga*MTQyMDExNzg2NS4xNjk3NzczODAw*_ga_VM3STRYVN8*MTY5Nzc3Mzc5OS4xLjAuMTY5Nzc3Mzc5OS42MC4wLjA." rel="noopener noreferrer nofollow">uncovered documents</a> in November 2022 revealing that FTX’s sister company, Alameda, held billions of dollars in “unlocked FTT” on its balance sheet, making it their largest asset at the time.
<h2 id="span-style-font-weight-400-bnb-is-the-king-of-exchange-tokens-span">BNB Is the King of Exchange Tokens</h2>
<img decoding="async" loading="lazy" class="aligncenter size-large wp-image-11539" src="https://defi-planet.com/wp-content/uploads/2023/10/Screenshot-2023-10-20-at-05-31-14-Market-Share-of-Centralized-Crypto-Exchanges-by-Trading-Volume-CoinGecko-1024x942.png" alt="Market Share of Centralized Crypto Exchanges by Trading Volume CoinGecko" width="1024" height="942" srcset="https://defi-planet.com/wp-content/uploads/2023/10/Screenshot-2023-10-20-at-05-31-14-Market-Share-of-Centralized-Crypto-Exchanges-by-Trading-Volume-CoinGecko-1024x942.png 1024w, https://defi-planet.com/wp-content/uploads/2023/10/Screenshot-2023-10-20-at-05-31-14-Market-Share-of-Centralized-Crypto-Exchanges-by-Trading-Volume-CoinGecko-300x276.png 300w, https://defi-planet.com/wp-content/uploads/2023/10/Screenshot-2023-10-20-at-05-31-14-Market-Share-of-Centralized-Crypto-Exchanges-by-Trading-Volume-CoinGecko-768x707.png 768w, https://defi-planet.com/wp-content/uploads/2023/10/Screenshot-2023-10-20-at-05-31-14-Market-Share-of-Centralized-Crypto-Exchanges-by-Trading-Volume-CoinGecko-600x552.png 600w, https://defi-planet.com/wp-content/uploads/2023/10/Screenshot-2023-10-20-at-05-31-14-Market-Share-of-Centralized-Crypto-Exchanges-by-Trading-Volume-CoinGecko-750x690.png 750w, https://defi-planet.com/wp-content/uploads/2023/10/Screenshot-2023-10-20-at-05-31-14-Market-Share-of-Centralized-Crypto-Exchanges-by-Trading-Volume-CoinGecko.png 1088w" sizes="(max-width: 1024px) 100vw, 1024px">
According to <a style="color: #0000ff;" href="https://coinmarketcap.com/view/centralized-exchange/" rel="noopener noreferrer nofollow">CoinMarketCap</a>, the exchange token market is currently valued at $42,330,170,665, with a trading volume of approximately $358,869,973, reflecting a massive and highly liquid market. But what stands out is that the exchange tokens market sharply mirrors the market share of these exchanges, with Binance commanding a substantial portion of the total trading volume on CEXs.&nbsp;
This dominance extends to the exchange tokens market, with <a style="color: #0000ff;" href="https://www.googleadservices.com/pagead/aclk?sa=L&amp;ai=DChcSEwi-1uTlgoWCAxWUxe0KHSzHBdsYABAAGgJkZw&amp;gclid=CjwKCAjwysipBhBXEiwApJOcuwza-QdgOhzS93dL6s3IMtqFeKxo9LSDQ1nGSPr2Au2wrAbS61JDohoCEO8QAvD_BwE&amp;ohost=www.google.com&amp;cid=CAESV-D24aJevmVw1OTb_NMsSTmKL_wLkDfSXRzILdIXyYQ-AzNxFXqB_gpZNO9tNR2BKx7BVTGcyBJkkYzNXKFDU0-8cSYgWIotpWXpRGdETEDSRY3dLFDzVw&amp;sig=AOD64_17BCYvroxWHd2XCry8ubNJgTdcyA&amp;q&amp;adurl&amp;ved=2ahUKEwjhxN7lgoWCAxUXVkEAHQAcDtQQ0Qx6BAgKEAE" rel="noopener noreferrer nofollow">Binance’s market capitalization</a> 2x higher than that of all the other exchange tokens combined.&nbsp;
This is attributable to the <a style="color: #0000ff;" href="https://defi-planet.com/2023/07/smart-contract-surge-bnb-chain-leads-with-46-5-market-share-in-q2-2023/" rel="noopener noreferrer nofollow">utility of BNB</a>, which not only offers incentives like trading fee reductions and access to <a style="color: #0000ff;" href="https://defi-planet.com/2022/04/what-are-ieos-in-crypto/" rel="noopener noreferrer nofollow">IEOs</a> but also serves as the native token for the Binance Smart Chain. This means BNB has deeper utility in the Binance blockchain as it is used for gas fees (transaction fees). Other exchanges, such as Kucoin and Crypto.com, have tried to replicate this model, but have been less successful as their blockchains have struggled to pick up as much steam.
<h2 id="span-style-font-weight-400-how-ftt-contributed-to-ftx-s-downfall-span">How FTT Contributed to FTX’s Downfall</h2>
In understanding why <a style="color: #0000ff;" href="https://defi-planet.com/2022/12/what-happened-to-ftx-the-anatomy-of-an-implosion/" rel="noopener noreferrer nofollow">FTX crashed</a>, it’s important to look at the role of FTT and the <a style="color: #0000ff;" href="https://defi-planet.com/2022/11/binance-backs-out-of-ftx-acquisition-deal/" rel="noopener noreferrer nofollow">involvement</a> of Binance. Initially, FTX seemed like a major player in the global crypto exchange scene, making FTT investments appear reasonable. However, this perception changed when we consider the substantial number of FTT tokens owned by a rival exchange, Binance.
At that time, Binance had a significant 23 million FTT tokens, worth around $529 million. Binance had acquired these FTT tokens as an early investor in FTX in 2019. When FTX cashed out Binance’s equity share in July 2021, it compensated Binance in FTT. The value of FTT <a style="color: #0000ff;" href="https://www.cnbc.com/2022/11/08/ftxs-ftt-token-plunges-80percent-wiping-out-over-2-billion-in-value.html" rel="noopener noreferrer nofollow">dropped</a> by 80% when Binance <a style="color: #0000ff;" href="https://defi-planet.com/2022/11/binance-to-liquidate-100of-its-ftt-holdings/" rel="noopener noreferrer nofollow">announced</a> its plan to sell its entire holding, instantly triggering a liquidity crisis.&nbsp;
Binance’s influence in the crypto market allowed it to significantly impact FTX and the market as a whole. Binance’s CEO, Changpeng “CZ” Zhao, is one of the most <a style="color: #0000ff;" href="https://defi-planet.com/2023/04/binance-ceo-changpeng-zhao-disputes-estimated-wealth-claims-by-bloomberg/" rel="noopener noreferrer nofollow">prominent figures in the crypto space</a>, giving him significant leverage. It’s worth noting that Binance also has a stake in X, the social nerve centre of the crypto community.
Another risk related to investing in exchange tokens is the <a style="color: #0000ff;" href="https://www.investopedia.com/terms/c/counterpartyrisk.asp" rel="noopener noreferrer nofollow">counterparty risk</a>. In crypto, counterparty risk is primarily associated with stablecoins and the assurance that these coins are backed by real-world assets.&nbsp;
Exchange tokens present a similar concern: What underpins their value?
<img decoding="async" loading="lazy" class="aligncenter size-full wp-image-11540" src="https://defi-planet.com/wp-content/uploads/2023/10/Screenshot-2023-10-20-163824.png" alt="FTX token on DeFi planet" width="1409" height="724" srcset="https://defi-planet.com/wp-content/uploads/2023/10/Screenshot-2023-10-20-163824.png 1409w, https://defi-planet.com/wp-content/uploads/2023/10/Screenshot-2023-10-20-163824-300x154.png 300w, https://defi-planet.com/wp-content/uploads/2023/10/Screenshot-2023-10-20-163824-1024x526.png 1024w, https://defi-planet.com/wp-content/uploads/2023/10/Screenshot-2023-10-20-163824-768x395.png 768w, https://defi-planet.com/wp-content/uploads/2023/10/Screenshot-2023-10-20-163824-1320x678.png 1320w, https://defi-planet.com/wp-content/uploads/2023/10/Screenshot-2023-10-20-163824-600x308.png 600w, https://defi-planet.com/wp-content/uploads/2023/10/Screenshot-2023-10-20-163824-750x385.png 750w, https://defi-planet.com/wp-content/uploads/2023/10/Screenshot-2023-10-20-163824-1140x586.png 1140w" sizes="(max-width: 1409px) 100vw, 1409px">
This risk involves assessing whether the exchange has enough liquidity to support its tokens and whether it has a reserve to tap into in case of sudden liquidity shortages, as was the case with FTX. Investors needed to exchange BTC or ETH for FTT tokens, and when the value of FTT dropped, there was no way to get back the BTC or ETH initially exchanged.
A close look at the <a style="color: #0000ff;" href="https://www.tradingview.com/chart/0x0AyViB/?symbol=BINANCE%3AFTTUSDT" rel="noopener noreferrer nofollow">FTT chart</a> paints a bleak picture of a token that lacks substantial real-world utility. In simpler terms, its value was mainly driven by speculation, with the price consistently falling below the moving average, indicating a persistent downward pressure.&nbsp;
This downward trend led to a price drop below the $21 resistance level, coinciding with the FTX liquidity crisis triggered by Binance. Following a post on X by Binance, a staggering $5 billion <a href="https://defi-planet.com/2022/11/binance-announces-plans-to-acquire-rival-ftx/" rel="noopener noreferrer nofollow">left</a> FTX in a single day.
<h1 id="span-style-font-weight-400-final-thoughts-span">Final Thoughts</h1>
While FTT did play a significant role in FTX’s downfall, the overall risk was linked to the utility of the exchange token. Exchange tokens may offer incentives and generate hype and capital for exchanges. However, the long-term sustainability of these tokens hinges on the practical utility they provide. Sometimes, the utility listed above, which every crypto exchange offers, is simply not enough.
&nbsp;
Disclaimer: This piece is intended solely for informational purposes and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence.
If you would like to read more articles (news reports, market analyses) like this, visit DeFi Planet and follow us on <a style="color: #0000ff;" href="https://twitter.com/PlanetDefi" rel="noopener noreferrer nofollow">Twitter</a>, <a style="color: #0000ff;" href="https://www.linkedin.com/company/defi-planet/" rel="noopener noreferrer nofollow">LinkedIn</a>, <a style="color: #0000ff;" href="https://www.facebook.com/DeFi-Planet-129907662611402" rel="noopener noreferrer nofollow">Facebook</a>, <a style="color: #0000ff;" href="https://www.instagram.com/defi.planet/" rel="noopener noreferrer nofollow">Instagram</a>, and <a style="color: #0000ff;" href="https://coinmarketcap.com/community/profile/DeFiPlanet/" rel="noopener noreferrer nofollow">CoinMarketCap</a> Community.
The post <a rel="noopener noreferrer nofollow" href="https://defi-planet.com/2023/10/ftt-was-in-the-middle-of-the-ftx-collapse-lets-spotlight-the-exchange-tokens-market/">FTT Was In The Middle Of The FTX Collapse, Let’s Spotlight The Exchange Tokens Market?</a> appeared first on <a rel="noopener noreferrer nofollow" href="https://defi-planet.com">DeFi Planet</a>.

FTT Was In The Middle Of The FTX Collapse, Let’s Spotlight The Exchange Tokens Market?

Table of Contents

DeFi Planet

Other articles published on Oct 23, 2023

Supra and Google Partner to Bring Fast Price Feeds to Financial Markets

Blockaid, MetaMask’s security partner, raises $33 million to enhance user protection

SBF Trial: FTX 2.0 Update Expected as Kevin Cofsky Testifies Tomorrow

Bitcoin and human nature

Hong Kong Regulator Gives Greenlight to Wider Retail Virtual Asset Investments With Applicable Sa...

FTX Creditor Claims Surge Past 50-Cent Mark, Spurring Hope Of Significant Recoveries

Join our free newsletter for daily crypto updates!