26Feb 2019

Test Driving The Future of Finance

by Tim Johnston

In June 2017, Binance raised $15m in an ICO for Binance Coin (BNB). At the time, it wasn’t exactly clear what the value proposition was for BNB. BNB offered traders a discount on trading fees on Binance’s exchange, but this wasn’t exactly groundbreaking.

Fast forward 2 years and Binance is spearheading some impressive and innovative efforts. The most pressing is the creation of Binance’s Decentralised Exchange (DEX), which will be powered by Binance Coin.

Apollo Capital sees decentralised exchanges as exciting developments and crucial infrastructure in the world of decentralised finance promised by crypto assets. Decentralised exchanges promise minimal counterparty risk, lower costs and censorship resistance. We thought it would be an interesting exercise to sign up for the testnet and take our readers on a test drive through the future of finance.

Binance’s Testnet is only available to current Binance customers that have a minimum of 1 BNB. Perhaps this is a savvy marketing ploy, but the first step was creating a Binance account and purchasing 1 BNB (I was interested to observe that the only thing required to create a Binance account was an email address: no ID or anything else is required).

1 BNB Required.png

Next I needed to fund the account where I could receive 200 free testnet BNB sent to my wallet on the DEX.

Funding BNB.png

Funding Secured.png

The exchange looks similar to Binance’s main exchange. There are similar buy and sell ‘panels’ in the bottom right hand corner. There are markets on the left hand side and market depth on the right hand side. The noticeable difference however is there is very little activity. I’m not sure how much feedback Binance is receiving from people using the testnet, but I’d imagine it would be limited until there is a critical mass of users. The lack of activity is understanding, albeit a little frustrating for enthusiastic users like us. I placed an order to buy some BTC for BNB and despite being the lowest ASK, my order remained unfilled for a number of hours. A stark difference to the experience on Binance’s main exchange.

DEX Homescreen.png

BNB Buy:Sell.png

While it is promising to see the launch of the testnet, it appears that the real test will come with the launch of the exchange. As is often the case with crypto projects, given the immutable and censorship resistant nature of blockchains, teams tend to take their time to make sure everything is working perfectly. When considering the irreversible nature of transactions and the value of assets at stake, there is little room in crypto to “move fast and break things”.

Binance’s impressive record over the past 18 months in growing the world’s largest crypto exchange shows that it is highly capable of developing large projects at scale.

Readers might question why Binance would seek to disrupt its hugely profitable exchange, with another exchange that is decentralised. Aside from the immortal words of Steve Jobs, “if you don’t cannibalise yourself, someone else will,” part of the reason is answered by the new business model of crypto.

Traditional business models often revolve around extracting as much revenue as possible out of customers. Crypto assets can offer a new business model whereby the founding team is rewarded with a large allocation of tokens. The team then works on the project, encourages early adopters to look at and invest in the project and seeks to increase the value of the token. All going well, the team is rewarded by an asset that increases in value, as are the early adopters. The key difference of this new business model is alignment – all participants in the network are aligned to increase the value of the token. Binance seems to be a working example where the team have a large and early interest in increasing the value of its BNB holdings, even if this is at the expense of its main exchange. Perhaps it is telling that the team is willing to cannibalise its hugely profitable existing exchange, in place of something which may be even more valuable.

Disclosue: Apollo Capital is an investor in Binance Coin

Tim Johnston

Tim is the Managing Director at Apollo Crypto. He has substantial expertise in both traditional financial services and technology investing. In financial investing, he worked at DMP Asset Management, a boutique Australian Equities Fund Manager, and was part of the investment team that managed a $33 billion super fund. On the technology side, Tim has worked as a venture capital Associate at Dominet Venture Partners and has been active in crypto markets for over four years. Tim is a CFA charterholder.