Okex: Exploring An Exchange Utility Token

Summary OKB is the utility token of the popular crypto exchange and derivatives platform OKX. OKX has almost no exposure to OKB through its Nansen proof of reserves wallet addresses and a large BTC backing. The token has benefited from the global popularity of OKX and a buyback program that has taken roughly 20% of the supply out of circulation. Since the collapses of companies like Celsius ( CEL-USD ), BlockFi, and FTX ( FTT-USD ) last year, there has been a greater skepticism of centralized crypto custodians and exchanges. Much of that skepticism has probably been justifiably focused on Binance ( BNB-USD ). From where I sit, any exchange that has a native token is one that should be given a little bit of extra scrutiny due to the possibility that these companies can occasionally be over-exposed to their own token supply. In this article, we'll look at a crypto exchange called OKX ( OKB-USD ). We'll explore the makeup of the exchange reserves and assess the tokenomics of the OKB utility coin. What is OKX? OKX is a cryptocurrency company that has been through some changes in recent years. The company was previously based in Beijing, China but has since re-located to Seychelles. In addition to changing headquarters location, the company rebranded to "OKX" from "OKEx" in 2022. The company operates a centralized exchange and derivatives platform that is usually among the top 10 in 24 hour volume and has 9 million monthly visits according to data from CoinGecko. Beyond spot and derivatives crypto offerings, OKX also operates a crowdfunding product called "Jumpstart" that has raised over $283 billion in startup funds through things like IEOs or Initial Exchange Offerings. Notable IEOs that have gone through this process on OKX include Toncoin ( TON-USD ) and the recently launched SUI blockchain (SUI-USD). Like many other centralized and decentralized crypto exchanges, OKX has a native utility coin that essentially serves as a blockchain-based rewards program for users of the exchange. OKB Utility (OKX.com) With OKB, token holders can generate passive income yields as well as discounts on trading fees within the OKX ecosystem. The more OKB that OKX users hold within their accounts, the better the discounts on those fees become. Token Supply & Performance From a supply standpoint, there are 300 million OKB coins with 60 million reportedly in circulation. Roughly 59 million of the original coins have been bought back by OKX through a "buy back and burn" program that started in 2019: OKB Burned by Round (OKX) The first round of token burning was in May 2019 and the most recent 19th round finished in February of this year. The buy back and burn wallet address holds roughly 19.5% of the total OKB and it is by far the largest single wallet address holder: OKB Distribution (Etherscan) The next two largest OKB holders are two separate OKX wallets that combined hold only 2.7% of the OKB outstanding. The remaining tokens are very well distributed among over 50k additional ETH wallet addresses. The top 100 token holders control just 22.9% of the OKB outstanding - and again, one of those addresses is the burn address. Coin Price: $44.05 Coin Supply: 300 million Fully Diluted Cap: $13.3 billion Fully Diluted Cap Rank: #8 From a fully diluted market cap standpoint, OKB has quietly become a top 10 crypto coin and has vastly outperformed all other exchange tokens over the last 12 months: 1yr Performance (Seeking Alpha) While other exchange coins have fallen apart, often in response to the exchanges collapsing, OKB is up over 177% over the last year and is only 24% off the coin's all time high price of $58.46. OKX Proof of Reserves By itself, creating an exchange token like OKB isn't what necessarily gets exchanges into trouble. When FTX collapsed last year, a major issue was the fact that a related party was holding so much of FTX's exchange token as collateral. According to proof of reserves data through Nansen, this is not the case with OKX: OKX Proof of Reserves (Nansen) Nansen cites $9.9 billion in proof of reserves assets on known OKX wallets. Of that $9.9 billion, 44.6% is held in Tether ( USDT-USD ), 31% is held in Bitcoin ( BTC-USD ) and over 20% is held in Ethereum ( ETH-USD ). The remaining token allocation is spread out among USD Coin ( USDC-USD ), Arbitrum's governance token ( ARB-USD ), and a handful of other smaller coins. The safety of something like Tether could certainly be debated and has been for years. But beyond that the OKX proof of reserves is very clean. Rank Site BTC Balance 24Hr Change 30D Change 1 Coinbase 486,644.31 -307.82 +3,871.32 2 Binance 395,945.02 -183,580.92 -149,323.24 3 Bitfinex 355,467.69 -1,766.56 +1,925.51 4 OKX 118,903.02 -327.21 -3,432.44 5 Gemini 92,523.71 +215.02 -12,365.24 Source: CoinGlass, as of 5/8/23 OKX has the 4th largest BTC position of any centralized exchange according to CoinGlass and more than half of the company's reserves are held in high quality blue chip cryptos like Bitcoin and Ethereum. Risks As an exchange coin, there are several risks to going long something like OKB. First, holders are incentivized to keep the token in order to receive better rates on products and services. This has a phenomenal positive feedback loop when an exchange is growing its user base and gaining market share. if OKX users churn or if the incentives no longer justify holding the OKB token, the price of the coin could fall very quickly. This is the key issue with the exchange token model and platform incentive structures changing is something that we saw happen with Crypto.com's Cronos ( CRO-USD ) exchange token last year . The value of that coin is down roughly 80% since I wrote about it following the changes to the incentive structure. Summary Exchange tokens in crypto can be fun because buying them is a bit like betting on the success of the exchanges themselves. They sort of work like non-dividend paying growth stocks in that regard. Especially if the token also provides some sort of platform voting rights. While most of these exchange tokens have small variations on what the utility is provided to the user within the platform, the fundamental similarity between all of them is buying them is betting on the success of the platform. In that regard, it's important to assess the sustainability of the platform's growth, the proof of reserves, and the TAM of the business. For OKX, a large portion of the volume comes from the derivatives business. This is not something that US-based crypto buyers currently have access to. This could theoretically be limiting to the future demand of the OKB token. However, the buyback and burn program has clearly helped propel the coin's price upwards. While I don't personally hold OKB, in my view there are worse coins in the crypto ecosystem to go long.