The market for cryptocurrency exchanges is quite competitive. Fees can only decrease so much before trading becomes free, and exchanges promise missile-proof security and 24-hour trading.
They realised they needed to differentiate themselves from the competition, issuing their cryptocurrencies, referred to as exchange tokens. Typical advantages include reduced trading fees, rebates, and early access to token sales on the platform.
What is an exchange token?
An exchange token is native to a cryptocurrency exchange and was created by the exchange’s operator; it is often referred to as a “utility token” because it has utility on the exchange.
Binance’s BNB, Huobi’s HT, and WazirX’s WRX are examples of exchange tokens. Tokens issued by exchanges, such as BUSD, HUSD, and USDC, are referred to as stablecoins rather than exchange tokens.
How do exchange tokens work?
Exchange tokens operate identically to all other cryptocurrency tokens. You can trade them on secondary markets or hold them for speculative reasons.
The centralised cryptocurrency exchange mints these exchange tokens; it is a firm with an executive team like that of a typical financial firm that manages an order book of buyers and sellers.
Decentralised exchanges, like Uniswap and SushiSwap, also have their tokens, although these are usually separated into categories, such as DEX tokens or DeFi tokens. The tokens are used in governance; stakers pledge them within various decentralised finance protocols to alter the parameters of the platforms.
How to buy exchange tokens?
Users can purchase exchange tokens directly from the crypto exchange that often pays the token rewards for completing tasks or trading certain coins. Some exchange platforms, like WazirX, airdrop, or give away tokens to holders to start the market.
Exchange tokens are not the same as stock in the company but often function like equity markets. They have value when people believe that the exchange will be successful and hold exchange tokens. The more activity on the exchange, the more demand for the exchange token.
Each exchange token has its own unique issuance schedule and tokenomics. Commonly, the team managing the exchange reserves a substantial sum, then retains the majority in reserves, distributing it to contributors and the trading community over time in order to encourage platform growth.
Lots of exchange tokens are deflationary. Binance has regularly burned its exchange token, BNB, on its native BNB Chain.
