Why Injective Protocol INJ Has the Potential to Be Bigger Than BNB. A Closer Look at the Buy Back and Burn Mechanism.
This is a follow up article to Why Injective Protocol (INJ) Is an Incredible Investment Opportunity which I encourage you to read first if you haven’t already. In this article I will explain how the buy back and burn mechanism for INJ differs from BNB and why INJ has the potential to be far bigger than that.
How the BNB Burn Works
According to CryptoCompare Binance did $1.5 Trillion Spot volume in May as well as $2.46 Trillion in derivatives volume, for a combined figure of $4.15 Trillion for May. BNB has shown how the burning of BNB based off 20% of Binance’s PROFITS has led to extraordinarily price appreciation and is currently valued at $101 Billion market cap.
The amount of BNB burned is based of 20% of the profits Binance makes (although they have reworded this to try and distance themselves from securities laws). Binance charges a flat rate of 0.1% on trading fees as well as withdrawal fees to form the revenue Binance earns. However, the amount of BNB burned is based off profit rather than revenue, and so costs have to be deducted such as wages, marketing, building rates, taxes etc leaving a far smaller portion. Of the remaining profit, 80% of that goes to Binance and 20% is used to burn BNB.
An important thing to note is that for the 20% Profit that is used to burn BNB this does NOT involve Binance purchasing BNB from the market to Burn. They are simply moving the equivalent value from the tokens they already own to the burn address, reducing supply. The hype building up to the burn event usually increases the price, which in turn actually means less BNB are burned.
We recently updated our whitepaper to better describe how we actually conduct the burn. For example, we removed the buy back reference because we actually don’t repurchase BNB and simply reduce the supply by burning BNB. We also removed the profit language because some regions tend to associate profits with securities, and we would like to distance BNB from that. So going forward, we plan to describe the burn this way, and burn what we burn — CZ from a coindesk article
How the INJ Buy Back and Burn Works
Rather than based on profit like Binance, INJ is based off the trading volume so the amount burned isn’t reduced for all the running costs. In addition, it’s also a far larger percentage with 60% of the trading fees being used to buy back and burn INJ, whereas the other 40% are used as referral rewards for exchanges / people who host nodes and route orders to the protocol. This is a potentially enormous referral program which has worked so well for Binance’s exponential growth early on. Rather than CZ benefiting from 80% of the profits, all of the revenue goes towards either burning INJ or towards incentives to grow the platform even further, creating positive feedback loops.
Injective Protocol, far bigger than just a DEX
Whilst Injective will be building their own DEX, Injective Protocol is far bigger than one DEX, it’s a protocol that will allow anyone to build any type of exchange on top. From Institutional grade exchanges to entry level. Whether it be Spot, Derivatives, NFT’s, Equities, Commodities, Forex, any market can be traded without restrictions. All the necessary tools will be provided, and all exchanges will share a decentralised order book enabling liquidity to be shared between every exchange. Trustless bridges will connect to all the major blockchain platforms enabling seamless, composable cross-chain interoperability. Any market can be added through governance with no huge listing fees or being at the mercy of centralised exchanges, whilst having unrestricted access to markets that make the crypto markets look tiny, markets worth quadrillions of dollars without KYC and regardless of originating country.
For each of these exchanges built on the Injective protocol, 60% of the trading fees are collected over a 2-week period where they will be auctioned off and used for the buy back and burn of INJ whilst the other 40% are used for referral rewards.
The Auction Mechanism — Market Buy of INJ
Every 2 weeks the tokens from the trading fees across the various pairs get auctioned off and sold to the highest bidder (paid in INJ). The winning amount of INJ then gets burned, reducing the supply, and creating deflationary pressures.
As a basic example assume 60% of the trading fees over a 2-week period was worth $100 Million. Multiple arbitrage traders will bid amongst themselves and the one with the highest bid in INJ ($99.5 million in the example below) wins the $100 million worth of tokens whilst profiting $0.5 million from the difference in selling the trading fees across variety of tokens. $99.5 Million of INJ would then get burned reducing supply and this process repeats every 2 weeks.
Unlike the BNB Burn which just involves moving the equivalent amount of BNB from the team’s wallet to the burn address, the INJ used to bid in the auction is bought from the market, creating enormous buying pressure. In addition, it’s not just one entity buying INJ to purchase the trading fees, it will be multiple each buying INJ from the market to bid against each other.
Based off Binance’s figures alone for May, that would involve buying $7.4 Billion worth of INJ for a single month, combined with lots of supply locked up in staking and used as collateral backing for derivatives then there is going to be limited circulating supply to purchase, with such high demand and limited supply this will lead to exponential price appreciation. The entire market cap of INJ is currently worth just $400 million. Each time a burn happens, the supply is reduced even further, leading to even faster price appreciation. It’s basically like someone relentlessly market buying enormous amounts of INJ every 2 weeks and then burning them.
Injective goes far beyond what centralised exchanges can offer, enabling markets not just in the $4.8 Trillion crypto spot and $5.5 Trillion derivatives market but those that completely dwarf that in size worth quadrillions, Commodities ($100 Trillion), Equities ($115 Trillion), Forex (2.409 quadrillion ($2,409,000,000,000,000)) and more. Removing the barriers and fragmentation within the crypto space across blockchains with trustless bridges to all layer 1 platforms as well as in the traditional space allowing Chinese traders access to US equities and vice versa. It enables fully decentralized trading without any restrictions or KYC, where anyone can gain exposure to any market regardless of the locality or limitations of the underlying asset, thereby creating a truly borderless financial system.
Injective Protocol is a completely decentralised platform, owned and governed by the community and from which the entire community benefits rather than a few individuals like with centralised exchanges, creating incredibly strong positive feedback loops. Add in 15% staking rewards and potential to earn 40% of trading fees as referrals, in my opinion this is an incredible investment opportunity.
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Disclaimer: These are my opinions based on my research and is not financial advice.