Exchange tokens are not equity (or the enigma of exchange tokens)

Exchange tokens were all the talk of 2019. Perhaps first buoyed by Multicoin Capital’s BNB thesis, exchange token bull cases began to proliferate around the analyst community during the first half of the year. It was around this time that Initial Exchange Offerings (IEOs) took off and many exchanges launched their own tokens to take advantage of market interest.

By the second half of the year, the theory of exchange tokens as pseudo equity emerged as consensus among the analyst community. It asserted that exchange tokens offer a claim on cash flow and thus could be conceptualized and valued like equity.

At first glance it made sense. Exchanges are the most profitable entities in crypto, collecting fees through facilitating speculation. If exchange tokens were a proxy on the cash flows of these businesses, investors could purchase these tokens to ride the wave of some of the most successful businesses in the industry.

Armed with this insight, investors could also utilize familiar valuation methodologies borrowed from traditional finance to value these tokens. In short, exchange tokens became the first cryptoassets with clear valuation methodologies - a comforting idea for investors.

However, the theory that exchange tokens are like equity is misleading. Token holders are not legally obligated to anything and token burns are not cash flows. Instead, exchange tokens are far more enigmatic instruments than we would like them to be.

A promise, not an obligation