How Binance is changing the rules of the game in the crypto market

Even the blockchain economy cannot absolve itself from concentrations of power. In particular, the new “crypto corporations” Coinbase and Binance are changing the market environment significantly. Why competition in the crypto sector is at risk in the long term, why Binance poses a systemic risk for the crypto market and why the sector has to rely on lobbying more than ever.

A start-up takes care of itself first and foremost. It has to build its business. Only when it has grown into an established company does a significant expansion of the ecosystem take place through takeovers, the development of accelerators and lobbying activities. Above all, however, the economic dependencies are changing. So far, a crypto start-up, unless it has made a retail token sale, has been dependent on venture capitalists such as VC companies or strategic investors such as banks. Now the former start-ups can become investors themselves and build a powerful ecosystem around them according to their ideas. The first crypto companies that can be counted to this new guard are Coinbase and Binance.

Because of decentralized economy

Despite the decentralization narrative of the blockchain economy, centralization tendencies are developing in the crypto sector. As in other markets that are establishing themselves, market leaders emerge who can win more and more shares for themselves. While smaller exchanges and brokers are being swallowed up or have to give up, an oligopoly structure is noticeably emerging. So claim the crypto exchanges Binance, Huobi and OKEx together account for around 77 percent of the total trading volume.

Although the network effect is not as pronounced as with the platform giants from Silicon Valley, it is precisely for this reason that attempts are being made to build a range of services around the core services so that users’ willingness to switch is reduced.

But centralization tendencies can not only be observed on trading platforms. Ultimately, the Ethereum blockchain protocol is also the clear leader as a smart contract platform in the DeFi or NFT area. As long as there are enough challengers such as Cardano or Polkadot, as well as distinguishing features, the current Ethereum dominance does not pose a problem. In particular, the DeFi ecosystem on the Binance Smart Chain can win more and more market shares from the original Ethereum ecosystem.

Centralization tendencies can also be observed in the mining sector. In order to mine crypto currencies economically, the importance of size effects increases with increasing mining difficulty. Smaller operators quickly fall behind.

Binance is one step ahead

No other crypto company embodies the “ecosystem strategy” more than Binance. Binance has invested in countless crypto start-ups and has made a gigantic takeover deal, especially with the purchase of the information service Coinmarketcap. The information service with the widest reach is said to have been worth $ 400 million to Binance.

Instead of focusing exclusively on individual products such as lending or staking, Binance goes one step further and wants to control the entire value chain. In the future, the company will be able to make itself more independent of pressure on margins and establish industry standards.

Crypto conglomerate: is Binance already crossing a line?

Even if Coinbase is more in the spotlight stands as Binance, the trading platform, which originally came from China, is much broader. From its own tokens, crypto debit cards, a token launchpad, various loan services and even its own blockchain, Binance can cover almost every corner in the crypto sector. Binance is now more like a crypto conglomerate than a trading platform. A crypto start-up can build an application on the Binance Blockchain, then process its token emissions via the platform and, last but not least, be listed there. This creates relationships of dependency that we otherwise only know from Internet platforms such as Amazon.

If one projects the current growth of the crypto platform two to three years into the future, then worries about dangerous market dependency cannot be dismissed out of hand. Just think of the stablecoin Tether USDT with connections to the Bitfinex crypto exchange. The trading volume of USDT easily surpasses the 100 billion US dollar mark per day. The well-being of the crypto market is largely dependent on the functioning of the stablecoin.

Dangerously high market capitalization

Although the valuation of shares and tokens is difficult to lump together, Binance with its Binance Coin (BNB) is clearly ahead of Coinbase with around 100 billion US dollars. The market capitalization of Coinbase shares is currently “only” 60 billion US dollars. If you consider that, unlike stocks, tokens do not include investor rights and, legally speaking, are little more than better vouchers, this amount is particularly worrying. In addition, Binance is far less connected to the real economy than a bank. After all, no real estate or companies are financed with the Binance deposits.

If Binance were a bank, it would be among the 20 largest banks in the world today. If the price growth of the last three months were to repeat itself again – which is unlikely – then the market capitalization of BNB would be larger than the market capitalization of the world’s No. 1: JP Morgan, which is currently valued at 390 billion US dollars.

This example shows that almost systemic risks for the crypto market can arise from an actor like Binance.

Dare to lobby more

As worrying as the growth of a Binance is, the market can benefit from such potent players from a political point of view. At least for now, the establishment of the crypto corporations is likely to have more advantages than disadvantages. As long as there is sufficient competition, these corporations can take on an urgently needed leadership role in the crypto sector. The lobbying interests of the crypto sector can only poorly be articulated to politicians by start-ups that simply have no resources for this. The associations founded on a voluntary basis, such as the Blockchain Bundesverband (Bundesblock) in Germany, also lack the financial means to carry out effective lobbying work.

The topic of regulation will continue to grow in relevance and with it the need to exert political influence. A crypto start-up scene that is only focused on itself runs the risk of having to take it easy in one place or another over the next few months. The damage caused by incorrect or excessive regulation is serious or even existential for crypto companies. Coinbase and Binance are now too big to ignore them – or their intentions.