WTF are Exchange Utility Tokens?

Last month one of the leading centralized exchanges (CEX) in the world, OKEx have decided to burn 700 million unissued OKB, the exchange’s utility token. The OKEx management also revealed that no more additional issuance of the utility token in the future, making the digital asset deflationary and the first of its kind that is fully circulated. 

With this development, the total supply of OKB now is around 300 Million and will continue to decrease as the exchange continues its on-going OKB Buy-back and burn program for the benefit of token holders. The CEX wrote in a blog-post that these initiatives were aimed to generate more value for OKB holders and users. 

If you have been in the cryptocurrency industry long enough I am quite certain that you have a good idea what is a Utility Token. But for the benefit of those who want a better understanding of the said asset and those who are new in the industry indulge me to discuss what it is and what role do they play in this nascent industry.  Let’s begin with its definition. 

What is a Utility Token?

According to bitcoinwiki.org:

"Utility Token is a digital asset that is used to finance the network by providing its buyers with a guarantee of being able to consume some fo the network’s products. Unlike security tokens and shares, it does not provide the rights of ownership over a part of a company."

In other words, it is a digital asset that serves as a right to use services and products of a particular network and are not considered equity or rights ownership of a company nor a stake on the company’s revenue. Moreover, its value emanates only for its inherent functions and properties within the network. 

Most of these Utility Tokens are issued using the Ethereum blockchain, the first and leading smart contract platform in the industry. High profile blockchain projects like BAT, Chainlink, and USDT used the ERC20 tokenization standard to issue their digital assets. 

Other highly successful projects originating from ERC20 tokens moved on to their own blockchains such as Binance Coin, EOS and TRON which are more scaleable, cheaper to use and do not require massive amounts of electricity to run. 

What are the Use Cases of Utility Tokens?

Now that we have an idea of what it is let us now discuss the various implementations of Utility Tokens. The most pervasive and common use case of Utility Tokens are used during blockchain-based crowdfunding and distribution events such as Initial Coin Offering (ICO), Initial Exchange Offering (IEO) or similar activities. 

Another use cases for Utility Tokens which have seen great success in the blockchain industry are Exchange Utility Token. Some of the more notable ones include Binance Coin. OKB and Huobi Tokens (HT) who all were initially issued as ERC-20 Tokens and eventually move to their own blockchain. Binance and more recently OKEx’s have now their own chains while HT is till using ERC-20 standard while its native chain is being developed. 

Exchange Utility Tokens are primarily used to incentivize users of the exchange. They are used as currency to subscribe to some exclusive services or membership and sometimes as some sort of a loyalty reward mechanism or other value-added services. A prime example of this is the Binance coin. Binance Coin is utilized to pay for discounted fees on its CEX as well as the opportunity to participate in exclusive Initial Exchange Offering (IEO) as well as voting on new listings.

Newdex Exchange Utility Tokens

Exchange Utility Tokens also exist on decentralized exchanges such as Newdex, the world’s largest EOS-based decentralized exchange. Dubbed as the Newdex Platform Ecological Token (NDX) it is used for VIP membership subscription, repurchase, and destruction, staking concessions, Token airdrops, advertising bidding, independent listing, and others. Furthermore, it serves as a loyalty reward for participating in KYC verification as well as in marketing and awareness campaigns.

Holding NDX allows users to trade without having to worry about CPU resources which is a required computational resource in the feeless transaction model of EOS. Users NDX staked are classified into different VIP membership levels. Higher-level VIPs have more CPU-less transactions,  more airdrops, and other benefits. NDX is a tradeable digital asset in Newdex that may or may not increase value over time.

Like Binance and OKEx, Newdex has implemented token buyback and token burning initiatives to stimulate a more positive price action for its own native exchange utility token NDX. Currently, there are 4 burning scenarios which are listed in the bullet below:

• 25% of Newdex transaction fee (based on the EOS obtained from actual token sale).
• 25% of Newdex OTC fee
• 25% of the Newpool management fee
• 25% of the interest income and penalty income from Danchor

Newdex has essentially allocated 25% of all its revenue streams for the buyback and token burning program of NDX. The program should decrease the total number of supply of NDX which is 10 Billion Tokens.

Token Buyback and Burning 

The prevalence of this activity in many of the leading Exchange Utility Tokens may make others wonder what is the relevance of this activity. As already stated above it is an effort to catalyze a more positive price movement of their Utility Tokens. It is based on pricing theory, the scarcity principle which states that the price for a scarce good, in this case, NDX, should rise until equilibrium is reached between supply and demand. 

In other words, the act of burning tokens will decrease the supply, the lower supply translates to higher prices by virtue of the aforementioned principle above. 

Final thoughts

Exchange Utility Tokens has become an integral part of both centralized and decentralized exchanges as a means to enhance the trading experience of their users as well as to add more value to their platform. I expect both centralized and decentralized exchanges to continue this practice and implement various burning scenarios to incentivize users to hold and keep their Exchange Utility Tokens.

I believe that exchanges will find creative ways how to implement burning scenarios that will keep users interested and engaged. They will offer various incentives that will entice users to accumulate these tokens and perhaps with enough development may evolve to tokens beyond what they were initially designed to do.

Transparency Disclosure:
The above article is a commissioned work for Newdex. I was tasked to write an educational article about Exchange Utility Tokens. Total creative freedom was given to me and all the information here came from my own research and of my own opinion based on my experience and knowledge. It has not been edited by Newdex or any of the aforementioned projects in the article.