Trans-Fee Mining: What You Need to Know
Jul 02, 2018
Background of Exchange Transaction Fees
Cryptocurrency exchanges make money by charging users fees based off of their transactions. As described in our June 01, 2018 Crypto QuanShot titled “Do You Know Your Cryptocurrency Transaction Fees”, each exchange is able to charge their own transaction fees. Such fees are in addition to the “blockchain fee” which is also charged, but this fee goes to that specific blockchain’s network instead of the exchange. For example, referencing the past Crypto QuantShot, all transactions on the exchange Gemini are charged a 1.00% exchange-specific transaction fee that goes straight to Gemini so they can make money.
Unlike the traditional fee structure mentioned above, Trans-Fee Mining is a different method for exchanges to conduct transaction fees all together. Trans-Fee Mining is a fee structure where exchanges still charge transaction fees, but after users pay this fee, the full transaction fee is reimbursed by the exchange. However, this reimbursement is in the exchange’s own specific token.
For example, the exchange Bit-Z is issuing 300 million of its own BZ tokens. To be reimbursed for a transaction fee on Bit-Z, the fee must be paid in either Bitcoin (BTC) or Ethereum (ETH). Subsequently, the reimbursement will be made in BZ tokens. This method incentivizes trading because traders are not (initially) losing money through transaction fees, and based on the market value of the exchange’s tokens over time, traders could end up making money by holding these tokens if they appreciate in value.
Investors should be wary of the Trans-Fee Mining method. Nefarious traders could manipulate the trades just to profit off receiving these tokens. If a trader uses an automated bot, they could buy, sell, then re-buy the cryptocurrency quickly enough to have minimal costs related to exchange rates, and then acquire three different commissions worth of the exchange’s tokens.
Additionally, the exchanges’ issuance of these coins has several similarities to Initial Coin Offerings (ICOs), which are closely watched by the SEC. This is particularly the case because of the risk of manipulation. One of the most outspoken critics on this topic, Binance CEO Zhao Changpeng stated, “If an exchange doesn’t get revenue from transaction fees and solely profits from the price of its token. How would it survive without manipulating the token price? Are you sure you want to play against a price manipulator? The same price manipulator who controls the trading platform?” Binance has their own coin, BNB, too, but users only use it to pay lower transaction fees, not to be reimbursed for them all together.
The Trans-Fee Mining methodology of paying transaction fees has been quickly adopted by many users, especially for exchanges CoinBene and Bit-Z. At the time ConBene and Bit-Z initiated Trans-Fee Mining, June 18th and June 25th respectively, the exchanges’ 24-hour trading volumes had shot up to ~USD$2 billion and ~USD$1.5 billion respectively. For reference, the previous #1 spot on CoinMarketCap for 24-hour trading volumes was Binance with only ~$1 billion worth of cryptocurrencies traded daily. CoinMarketCap has since created a separate 24-hour trading volume scale for exchanges with no fees, which includes Tran-Fee Mining.
- IQOption & OTN
- BigONE (currently considering)