UNI VS platform coins, who is the best catcher of transaction value?

Author/ Song Xiaowan

Since Uniswap announced the launch of its governance token on September 17, the controversy surrounding UNI has never disappeared.

Uniswap airdropped 150 million UNI to nearly 50,000 addresses that had called Uniswap V1 or V2 contracts, which was equivalent to more than 1 billion yuan at the time. It was called a story that "will be recorded in the history of the cryptocurrency miracle."

With its fame, UNI rose by 125% in just two days. UNI supporters are one of the few productive assets in the crypto space, calling UNI the "next BNB" or even the "next Bitcoin."

Some people also say that UNI is the best pit, and it buries the most people. UNI has a total market value of 35 billion yuan. "How many years will it take to make back the investment through dividends? Moreover, it does not even have the right to dividends, and it relies on the empty governance rights to fool people? Most of the tokens are in the hands of the project party and investment shareholders. If you buy them with cash, how much money do you have to buy votes with a little say?" said the blogger "Coin Circle Operator Lanqi".

It is difficult to say who is right and who is wrong, but if Uniswap is placed in the competition sequence of the three major exchanges, what will happen to UNI?

Which one is better, UNI or exchange coins?

According to the exchange token equation released by Multicoin Capital, the exchange token network value = the value generated by the exchange * the efficiency of capturing the token value.

Indicators for judging "value created by exchanges" include: revenue, daily users, website traffic, breadth of product offerings, community credibility, quantity, liquidity, management team capabilities, etc.

The efficiency of value capture refers to the ability of the token price to grow as the exchange's market share grows. For example, buyback and destruction, cash flow, speed sinking, transaction discounts, voting rights, destruction/price ratio, inflation/distribution ratio.

According to the formula provided above, UNI obviously does not have an advantage. Whether in terms of the efficiency of value creation or value capture by the exchange, the current UNI cannot be compared with the platform coins of the leading centralized exchanges .

Uniswap has a total transaction volume of more than 20 billion US dollars in the past two years and has more than 250,000 independent addresses. The daily transaction volume of the top exchanges can reach over 1 billion US dollars, and Binance had 9 million users at the end of 2018.

In comparison, UNI’s advantages are :

1. UNI is one of the few productive assets in the crypto space.

2. High efficiency and low cost. The Uniswap team has less than 20 people and almost no server costs, while the top exchanges have hundreds or even thousands of employees, and the maintenance and operation costs are high.

3. Holders of platform coins have no say in the development of the token economy, while UNI holders can participate in exchange governance .

At the same time, there are 6 hidden dangers behind UNI:

1. Uniswap token issuance has no threshold, resulting in uneven quality of tokens. Traditional exchanges selectively list tokens and screen them for quality. Uniswap can only trade ERC-20 tokens, while traditional exchanges can trade tokens from different public chains.

2. Uniswap uses AMM (Automated Market Maker System), which can only generate transaction prices but cannot discover market prices . Therefore, arbitrageurs have to be introduced to fill the AMM price until it converges with the market price. In other words, Uniswap cannot exist alone for the time being and must rely on the market price given by CEX.

3. Transactions on Uniswap require gas fees, which are intercepted by Ethereum miners. However, transactions on platform coins basically do not require additional fees, and it is a closed system. For example, on September 17, after UNI was officially launched, the price of gas on the Ethereum network continued to rise, once exceeding 700Gwei.

4. Governance issues are questionable. According to the rules, Uniswap needs 10 million UNI to initiate a proposal. William, chief researcher of OKEx, said: " The main function of UNI is governance voting at present , but judging from the currency holding addresses, the top five addresses account for half of the usage. For small and medium-sized users, governance voting is just an illusory power, so the actual value of UNI is very low at present."

5. UNI is an inflationary currency. After 4 years, UNI's annual inflation rate will remain at around 2%, while the platform currency will continue to deflate due to repurchase and destruction.

6. UNI holders are not sufficiently incentivized.

OKEx stated that it would use 30% of the transaction fees each quarter to repurchase OKB in the secondary market, while Huobi stated that 20% of the quarterly revenue of Huobi Global and Huobi DM would be used for HT repurchase. The previously announced destruction amount of BNB was 20% of the net profit each quarter until the number of BNB decreased to 100 million, and the BNB destruction ratio was no longer disclosed afterwards.

What are the benefits of holding UNI besides the rise and fall of the token? It is reported that Uniswap's 0.3% transaction fee was previously used to reward liquidity providers (LPs), but now UNI holders will be charged 0.05% of each transaction fee, and the reward for liquidity providers will be reduced to 0.25%. UNI does not have an advantage in dividends.

DeFi has risen rapidly, and DeFi tokens such as LINK, YFI, LEND, and UNI have successively entered the top 100 or even the top 10 in the crypto market value, but none of them can compare with UNI. UNI's voice is more powerful and fierce, perhaps because it has launched an impact on the top of the crypto food chain: once UNI succeeds, the structure of the crypto world will be reconstructed.

Unlike platform coins which have mature financial logic, part of UNI's 15 billion market value comes from imagined potential value , which shows that investors have hope for the track behind UNI, similar to the securities market's extremely high valuation of technology stocks.

Compared with the booming UNI, the prospects for platform coins look much bleaker.

The dilemma of platform coins?

From the perspective of value capture, compared with the governance tokens of DEX, the platform coins of centralized exchanges are built on a sound financial logic, have practical uses such as "deducting transaction fees" and "participating in IEO", have profit support, and dividends or repurchases enable them to have long-term appreciation. Continued deflation gives them greater room for imagination.

But the objective fact is that under the impact of DeFi, platform coins seem to be "on the decline", lacking the wealth effect and are not being pursued by investors.

Why are platform coins in a price dilemma?

(1) Internal contradictions

As mentioned above, the appreciation logic set by most exchanges for platform coins is to buy back and destroy to cause deflation. This creates an inherent conflict. Most of the exchange's income is tokens, and it needs to sell tokens to make a profit, which will cause the price of the token to fall; but it also needs to buy back or distribute dividends, which may cause the price of the token to rise. So the question is, which operation has a greater impact?

In terms of specific repurchase strategies, exchanges are more likely to implement strategies that are beneficial to the exchanges rather than those of investors. This is an inherent contradiction between exchanges and users.

(2) The stakes are becoming increasingly dispersed

In the turbulent market cycle, platform coins have gained more and more favor from investors with the labels of "anti-fall", "valuable" and "long-term growth", but it is precisely because of this that the distribution of their chips has become increasingly dispersed.

Too much dispersed chips will inevitably lead to mutual constraints on investors' trading behaviors. The ultimate result is that platform coins tend to fluctuate up and down within a range without generating any major market trends.

Therefore, in order for the price of the currency to rise, there must be a force that controls and locks a certain proportion of the chips, thereby creating a certain scarcity effect in the market, and at the same time is willing to pay a higher price to buy, thereby pushing up the price of the currency and triggering FOMO sentiment.

As the chips of platform coins become more dispersed, the exchange's ability to control the chips of platform coins will become weaker and weaker. In other words, the price of platform coins will become more and more market-oriented .

(3) Serious insider trading

Due to information asymmetry, platform coins often become "cash machines" for exchange employees. Relying on the information of important positive events that are predicted in advance, they can ambush accurately and wait for the good news to be released before shipping. Therefore, it is not surprising that the platform coins of many leading exchanges are suddenly hit by a slump before the "good news" has fermented .

(4) Continuous selling pressure

In the exchange system, platform coins are not only the "face" of the exchange, but also have certain financial functions. For example, they are used as incentives for ordinary employees and senior executives, and exchanges will use platform coins to pay salaries. This will inevitably generate continuous selling pressure and suppress prices.

If we have to say the last reason, it is that when the chips are dispersed, the exchange has insufficient control over the market, and the cost of pulling up the price is getting higher and higher. Nowadays, the exchange is increasingly lacking the motivation to actively pull up the price. The motivation to pull up the price comes more from the "excellent performance" of competitors' platform coins and the corresponding competitive KPIs.

“Why should the money earned by the exchange be used to manipulate the market and give money to the leeks?” an executive of a leading exchange once said.

When the chips of the exchange's platform coins become more and more dispersed and the exchange is no longer willing to actively pull up the market, are the increasingly market-oriented platform coins still worthy of investment?

"My answer is that platform coins are still worth long-term investment." Li Feng, an analyst at DeepChao, said: "From the development trend, centralized exchanges will still be the mainstream of transactions in the long run. They have great advantages in price discovery, matching efficiency, and comprehensive services. The value of platform coins is supported by real profits."

As long as the exchange's business grows, the logic of the platform currency's value growth remains unchanged. Under the influence of continuous repurchase and destruction, the price of the platform currency will maintain steady growth every year.

Even with the impact of DEX, centralized exchanges will rely on the exchange public chain and actively participate in the DeFi ecosystem, blurring the boundaries between DEX and CEX.

“If I have to give a suggestion to the exchanges, it is that they give the platform tokens more governance functions. ” Li Feng said: “Platform tokens may not make you rich, but at least they will not make you lose money and go bankrupt. This is good advice.”