What are Exchange Tokens?

2022-11-24, 01:17

TL;DR

- Traders on such platforms are charged fees for the cryptocurrency exchange services provided, with Crypto exchange tokens facilitating these transactions.

- Exchange tokens can be used to pay for services and hedge risks during a market downturn within the crypto exchange ecosystem.

- To increase the value of their native exchange tokens, some exchanges employ various strategies, the most common of which is token buy-back.

- Exchange tokens are typically used to pay transaction, listing, withdrawal, or deposit fees. Exchanges typically provide additional discounts or rewards to users who use their exchange tokens to pay for various fees within the ecosystem.

Introduction

Exchanges for cryptocurrencies connect buyers and sellers, making trading in these digital assets more accessible. Cryptocurrency exchanges play the roles of security exchanges and banks in a digitized model. Traders on such platforms are charged fees for the cryptocurrency exchange services provided. These payments become difficult to initiate in fiat currencies or cryptocurrencies such as Bitcoin. This point is where crypto exchange tokens come to help. Crypto exchange tokens facilitate cryptocurrency exchange transactions made possible by simple payment methods- a unilateral model. Payments are made in the form of cryptocurrency exchange native coins.

What are Exchange Tokens?

Exchange tokens can be used to pay for services and hedge risks during a market downturn within the crypto exchange ecosystem. These tokens also provide various bonuses and benefits when used with exchange tools and products. Most exchanges generate tokens on the blockchains of other projects, most commonly Ethereum. Exchange tokens are a growing digital token with the added credibility of being issued by legitimate infrastructure projects and existing businesses.

How Exchange Tokens Work

Exchange tokens are the issuing exchange's loyalty and reward program. They have been compared to airline miles by some observers. The difference is that exchange tokens can be traded on multiple exchanges and are regarded not only as utility tokens but also as investments. To increase the value of their native exchange tokens, some exchanges employ various strategies, the most common of which is token buy-back. Exchanges commit a portion of their commission revenue or profits to buying back tokens from users and then burning them, reducing the circulating supply. Some exchanges, such as Kucoin, have pledged to reduce the supply of their exchange tokens from 200 million to 100 million through buy-back programs.

Difference between Coin and Token

The terms coin and token are often mistaken in crypto circles, but they are different in the strict sense. This difference is the reason we say exchange token and not exchange coin. Crypto tokens are a type of cryptocurrency representing an asset with a specific use on the platform where it is issued. Existing blockchains are commonly used to create tokens. Tokens are created with utility in mind, allowing users to access and use a more extensive crypto-economic system. Most tokens are designed to be used with decentralized applications or dApps. Tokens are not intended to function as a store of value in and of themselves. Instead, they work in conjunction with the software developed with them. ERC-20 tokens, for example, are intended to operate on the Ethereum system and blockchain.

Benefits of Exchange Tokens

Tokens based on cryptocurrency exchanges primarily serve to provide liquidity to the exchanges. Increased liquidity on cryptocurrency exchange platforms results in a high volume of trades. Large trade volumes boost crypto exchange earnings by increasing the platform's marginal fees for transactions.

Cryptocurrency exchanges use exchange-based tokens to reduce transaction fees for trades. Traders receive lower transaction fees when they use tokens instead of fiat currencies or other cryptocurrencies to pay transaction fees.

Crypto exchanges reduce fees to encourage crypto traders to stay loyal to their platforms. Furthermore, lower transaction fees have a direct positive impact on trading volume.
Exchange-based tokens, such as governance tokens, may be used by cryptocurrency exchanges. Governance tokens are helpful in community-run platforms requiring members' decision-making input.

The participation of members in decision-making cuts across various elements of the organization or platform. These elements could include, among other things, a vote to create new tokens, a transfer to a new blockchain, the election of officials, and dividend payments.

On the other hand, governance tokens are not commonly used by cryptocurrency exchanges. Only a few cryptocurrency exchanges use governance tokens to power their platforms.

Governance tokens are becoming increasingly important in the crypto scene, particularly concerning converting centralized to decentralized exchanges. Top management or executives at centralized exchanges such as Binance make all decisions without consulting traders. Governance tokens aim to break this monopoly in cryptocurrency exchange decision-making structures. The result is a healthy, decentralized crypto industry.

Examples of Exchange Tokens

Gate Token (GT)
Gate Token (GT) is a one-of-a-kind token of the Gate.io cryptocurrency exchange. It is a token inextricably linked to the exchange's chain and how it operates, as it is used to power the platform, pay gas fees, facilitate liquidity between cryptos, and much more.

It provides the exchange's users with a high-performance trading experience. Furthermore, it provides advantages such as faster transactions and fee reductions. And, of course, because the platform uses the token for buybacks and burns, owning the token may be advantageous in terms of potential price gains.

Most importantly, Gate.io is frequently the first exchange to list new tokens, which attracts new users who want to invest in new projects before token prices rise due to listings competing for larger exchanges.

The Huobi Token (HT)
The Huobi exchange launched its token to reduce trading fees. The token is a security deposit on the Chinese platform to certify traders. As a result, the Huobi token functions as a KYC instrument, increasing the overall security of the Huobi platform and investor confidence and trust.

KuCoin Shares (KCS)
The KuCoin exchange provides platform KCS token holders with a dividend-style payout system. KuCoin distributes roughly half its transaction fee earnings to KCS token holders to provide members with incentives.

The OKEx Token
The OKEx token, or OKB, is the native coin of the cryptocurrency exchange OKEx, and it was launched without any fundraising or an ICO. The OKEx platform distributed approximately 60% of OKEx to platform users for free. OKEx did not create OKB to seek monetary gains or liquidity, unlike other tokens. OKEx launched OKB to improve the system's efficiency and smooth transactions within the OKEx ecosystem.

FTX Token (FTT)
FTT is the FTX ecosystem's native crypto token. FTX is a cryptocurrency derivatives exchange focused on over-the-counter (OTC) trading, offering futures and leveraged tokens. FTT holders benefit from the FTX exchange as the utility token, including lower trading fees, fee burning, OTC rebates, collateral for futures trading, and socialized gains from the insurance fund. FTX has carefully designed incentive schemes to increase network effects and demand for FTT while decreasing its circulating supply.
Last week, FTT lost most of its value after rival Binance announced plans to acquire the company. The coin dropped from around $22 to below $5 in a single day, erasing more than $2 billion.

Conclusion

Exchange tokens are tokens that are native to specific cryptocurrency exchanges. The tokens' functions include lowering transaction fees, providing liquidity, and acting as governance tokens on cryptocurrency exchanges. Different cryptocurrency exchange tokens play distinct roles on their respective platforms. For example, some serve as a payment solution for IEOs for projects launched through the platform.

Author: Gate.io Observer: M. Olatunji
* This article represents only the views of the observers and does not constitute any investment suggestions.
*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement.