Binance, OKEx, and Huobi – shifting the competition to the public chain

As the blockchain industry grows, cryptocurrency exchanges are coming out on top. Gruelling bear markets and economic downturn shake out one promising startup after another. Yet, exchanges with their high traffic and stable transaction fee model are able to weather the storms. And those at the top of their game are taking the battle to a whole new level: the public chain.

Three leading exchanges are vying for the throne right now: Binance, OKEx, and Huobi. Binance clearly has first-mover advantage, having launched Binance Chain a little over a year ago in April 2019. However, while both still in testnet, newer entrants Huobi and OKEx are also showing promise.

How the exchange competition evolved into the public chain race

Centralised exchanges will always have a place in crypto. They provide users with convenience and efficiency. They also help onboard more people to the cryptocurrency space and made enormous contributions to growing the industry, particularly in the early days. However, the market is growing fast and, along with it, the demand for new types of services in which efficiency and convenience may not be the core drivers.

If behemoth exchanges want to tap into these new areas they need to innovate and push outside of their comfort zones: to the public chain. As arguably the most important blockchain infrastructure, public chains can offer users (as well as the exchanges behind them) enormous benefits.

Binance Chain, OKChain, and Huobi Chain 

Binance is clearly leading the way right now in the exchanges’ public chain race. Binance Chain primarily hosts Binance DEX, its decentralised exchange, although, the company announced just last month that it would be launching a second chain. This will be smart-contract enabled and allow developers to build on it using Ethereum’s Virtual Machine. In launching a second chain, Binance aims to maintain the speed and functionality of its original chain and connecting the two through a cross-chain bridge.

OKEx launched the testnet of OKChain in February of this year, completing open source two months later. It is designed to enable an ecosystem of decentralised finance and large-scale blockchain-driven commercial applications. Although it hasn’t reached mainnet yet, the first phase of ecological partner construction has been completed. This includes such elements such as the public chain itself, a wallet, explorer, and PoS mining pool.

OKChain appears to be the most decentralised of the three public chains as each of the nodes on the network has a high degree of autonomy. This is in contrast to Binance which largely controls node operations and transaction pair operations.

Huobi Chain, like OKChain, is also open-source, launching to testnet this February. Unlike its competitors, Huobi aims to provide services for financial services institutions and has a high focus on regulation. This gives it a different positioning from Binance and OKEx, and also a lesser degree of decentralisation as Huobi Chain uses a variation of Delegated Proof-of-Stake (DPoS) and will have regulators as validators on the network.

Inflationary vs deflationary economic models

Both Huobi and Binance have opted to use their native tokens BNB and HT to power their chains. OKEx, on the other hand, has created a new token OKT instead of using its exchange token OKB. This is interesting as it highlights the difference between two economic models: deflationary and inflationary.

There is a longstanding conflict of interest between the two parties involved in the public blockchain ecosystem: token holders and users (including dApp developers).

To keep the chain in balance, there needs to be a relatively equal number on either side so as not to disrupt the entire network. Users, for example, suffer if exorbitant fees inhibit the chain’s growth and make the cost of using the chain prohibitive. Token holders, on the other hand, want the price to increase and hold their tokens with that very expectation.

In a deflationary model like that of Binance Chain or Huobi Chain, there is the very real danger that rising fees lead to a decreased number of users. This, in turn, leads to a loss of nodes as the rewards for validating are reduced and the chain becomes more centralised. Eventually, the entire value of the public chain could be lost–including the native token.

OKEx aims to circumvent this problem by issuing OKT and allowing for an inflationary model in its public chain. Since nodes can issue tokens, they don’t have to rely on an ever-decreasing fee income. This should also, in theory, mean that the entry of new nodes is not prohibitive, therefore increasing the degree of decentralisation.  

Final thoughts

While Binance Chain was first to market out of the exchanges, it is the only one of the three not to have committed its code to open-source. Given that open-source is a prerequisite to scalability, it’s curious that Binance has not done this and perhaps one of the drivers behind its second chain.

However, Huobi with the same economic model has made its code open-source allowing for anyone to inspect and build upon. Of the three blockchains, Huobi Chain is the slowest growing right now with just one project on it compared to Binance’s 30 and OKEx’s 18. This is probably due to its high focus on regulation which is well-known for slowing down processes.

As both Huobi Chain and OKChain were only launched in the first quarter of 2020 and Binance’s second chain is in the pipeline, it’s too early to say yet which of the three exchanges has the public chain model truly figured out. There’s certainly plenty of potential for growth and it will be interesting to watch how the competition in this area unfolds. 

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