Delphi Daily

Disclosure: Delphi Ventures has invested in RUNE, SUSHI, and UNI. This statement is intended to disclose any conflict of interest and should not be misconstrued as a recommendation to purchase any token. This content is for informational purposes only and you should not make decisions based solely on it. This is not investment advice.

Tomorrow will mark a historical moment in crypto as Coinbase’s stock, COIN, lists on the Nasdaq with a reference price of $250 implying a ~$65 billion valuation. It will obviously be an important event to watch as it was rumored to be listing at a valuation closer to ~$100B while some analysts already have targets well above that. Amid the speculation, let’s revisit the current exchange token landscape, many of which have seen remarkable returns over the last few months. Both DEX & CEX tokens have been among the top performing sectors in crypto in 2021; year-to-date, the combined market cap of CEX & DEX tokens appreciated 10.5x, significantly outperforming the overall crypto market, which increased 2.7x during the same period.

The rise in exchange tokens has been driven in large part by Binance’s BNB token, which recently reached a total market cap of $92bln. There’s little doubt the approaching Coinbase IPO has shed light on other centralized exchanges and positively contributed to BNB’s performance. However, the price action of BNB has been less reliant on speculation and well supported by real adoption. 

Similar to COIN, BNB accrues value from future cash flow generated by trading volumes. This is because every quarter, based on the number of trades performed, Binance burns a portion of BNB from their reserves, permanently removing them out of circulation and increasing the value of the remaining BNB supply. To date, the company has burned $426M worth of BNB. Over the last few months, volumes on centralized exchanges have surged, reaching new record highs. The latest BNB burn was Binance’s largest on record at ~$165M.

Unlike stocks in traditional markets, however, exchange tokens can incorporate value accrual mechanisms that extend well beyond simple trading volumes. BNB can be used for continuous or one-off discounts/perks on Binance’s products and services, as well as special discounts when users pay trading fees in BNB.

More importantly, BNB is now uniquely positioned to capture significant additional value because in addition to trading commissions it massively benefits from the increased adoption of Binance Smart Chain (BSC). As the native token of BSC, BNB is used to stake to secure the chain and process transactions. This transforms BNB into a yield generating asset, creating additional demand for the token. Moreover, we see BNB getting used more and more in DeFi as a collateral asset. The increased adoption of BSC is most evident in the chart below where we see TVL growing with no signs of slowing down in near future.

In the below chart, we compare appreciation (%) in both BNB market cap and Binance exchange trading volumes since q4 2020. Late in February 2021, we notice a material appreciation in relative value; BNB continued to appreciate while trading volumes retraced. However, this price appreciation coincided with the growth and rising popularity of BSC, especially as gas fees on Ethereum pushed users towards alternative chains. Therefore, the recent run up in BNB’s price is likely a combination of increased speculation heading into the Coinbase IPO, as well as increased adoption of Binance Smart Chain.

In the below chart, we compare the valuations of prominent CEXs and DEXs to their real trading volumes. The bars indicate the ratio of market caps of platform tokens over daily trade volumes across prominent CEX and DEX platforms. We quickly notice that DEX tokens are valued higher on average relative to actual volumes taking place. The added current and future benefits of open, accessible, decentralized platforms undoubtedly play a key role in this distinction.

The absolute volume and valuation figures associated with top CEX and DEX tokens can be seen below. Binance dominates CEX platforms in terms of trading volumes, currently generating on average ~10x more volume than Coinbase. The behemoth shows no signs of slowing down, evident in its recent announcement of the launch of zero commission tradable stock tokens; how long until we see COIN being traded on Binance?

On the other hand, DEX’s suffering from on-chain fees can’t fully capture all of the new inflow. Spot trade volumes on DEX platforms sit around ~5-6% of that in CEXs, well below the maximum market share of 20% reached by the end of summer 2020. DEX platforms can quickly accommodate much more volume when unbearable on-chain fees perish away with the introduction of new scaling solutions.

Finally, we notice that Thorchain’s RUNE stands out amongst DEXs in terms of relative valuations. This is mostly due to RUNE’s unique value accrual mechanism and the upcoming Thorchain launch, which has been implied by Erik Voorhees to be more important than Coinbase IPO.

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