First Published on @IOSG Medium on Jul 17, 2020

This report aims to analyze an exchange platform token and illustrate the methodology of how we evaluate it. The crypto exchange industry is one of the few profitable use cases in the whole blockchain industry. It has such a controversial proposition as on one hand, the public’s first impression of the blockchain industry may have come from trading platforms, which can be associated with scams from time to time; on the other hand, it keeps bringing up many new business models and attracting the mainstream to the broad blockchain ecosystem. We recognize the value added to the ecosystem and have seen a fast growth of both their business and the platform tokens.

Tracking the progress of an exchange can be an important angle to observe the rise and fall of the entire industry. Exchanges are extremely sensitive to the needs of their users so to provide up-to-date products and services. In this report, we choose one of the most popular platform tokens to elaborate on its development and growth potential. We added our thoughts on various business sectors and concluded the report with our analysis results.

We hope you enjoy the read.

Huobi is a global cryptocurrency trading platform providing users with spot and derivatives products. After securing investments from notable angel investors and Sequoia Capital etc., Huobi Group quickly captured a large amount of market share and became a top crypto exchange worldwide. Founded in 2013, the exchange used to account for more than 60% of global bitcoin trading before the Chinese government officially banned crypto trading in September 2017. Late 2017, Huobi removed all the trading services away from China and established Huobi Global and opened local trading platforms like Huobi South Korea and Japan. The firm entered the phase of global expansion with the Group’s cumulative turnover exceeding 850 billion USD. In April 2019, Huobi Global’s 24-hour trading volume for spot market reached 1st place according to CoinMarketCap. Huobi has kept its research regulatory compliance arm of Huobi Group, has set up an office in Hainan Free Trade Zone, a frontier where China tests some of the most liberal ideas.

Besides the Huobi Global, with which users are most familiar, Huobi Group has several other prominent business units.

Huobi OTC offers an exchange bridge between fiats and digital assets without trading fees and has been recognized as one of the most user-friendly OTC worldwide. Though its revenue doesn’t directly contribute to HT token burning, it helps the platform reach more users.

Huobi Korea is a professional and convenient Korean won (KRW) -based digital asset trading platform. By adopting a localized operation mode, Huobi Korea has a full-fledged Korean customer service system.

Huobi Japan is one of Huobi Group’s strategic overseas operations. Through acquiring a licensed Japanese cryptocurrency exchange ‘BitTrade’ in September 2018, Huobi Japan has since been able to provide Yen-to-crypto trading services in a legally compliant manner.

Huobi Pool integrates mining and trading services and launched in 2018. The platform is connected to the trading platform, where miners’ earnings can be withdrawn, deposited, and traded on the Huobi exchange or Huobi OTC. The hashrate is currently 3,854.53 PH/s and broke into the seventh spot of the total hashrate share distribution over the last 6 months [1].

Huobi Cloud is a one-stop solution provider for global digital asset exchanges. Huobi has been offering exchange services via its API or a white-labeled cloud service especially in Middle East and Africa. By November 2019, there were 150 platforms under the Huobi Cloud umbrella, plus 80 partnerships deal in the pipeline [2].

Huobi Institution offers professional traders and institutions various high frequency and low-latency trading solutions, such as colocation options, to meet trading demands. It also offers bespoke solutions for instance OTC loan, staking and mining and other one-stop services. Up to date, Huobi Institution’s users contribute up to 40% of overall trading volume.

This report aims to evaluate the Huobi Token; therefore, we will leave out the above business lines as their revenue doesn’t directly contribute to the token value.

We will start with HT token distribution plan and introduce our examine methodology. Next, we will discuss three deterministic factors that impact HT valuation directly, including Huobi’s revenue stream, HT buyback plan, and the utility of HT. We will then talk about the indirect factors, such as the financial products, public chain, and provide an overview of Huobi’s business and its team structure. In the end, we will conclude the report by addressing all crucial attributes mentioned.

HT is short for Huobi Token, which is the Huobi global ecological Token. HT holders shall obtain the corresponding benefits of the whole ecosystem of Huobi and get ecological sub-token rewards, as well as the valuation promotion brought by sustained repurchase and destruction.

To analyze the valuation of HT token, we firstly take a step back looking at its token distribution model.

HT was launched in January 2018 with a total supply of 500 M. Among those,

• 300 M (60% of the total supply) has been given away for free as a benefit for the purchase of “point discount cards”

• 100 M (20% of the total supply) was used for user rewards and platform operation

• 100 M (20% of the total supply) has been reserved as team incentives and subject to a 4-year vesting schedule according to the Huobi official website [3].

HT has a market cap of $968,226,828 and priced at $4.15 according to CoinGecko on 7th July 2020.

In March, 2020, Huobi announced that it will not increase the total supply of HT in the future [4].

It shall also be noted that, there is another token besides HT inside Huobi’s whole ecosystem. HPT (Huobi Pool Token) is issued by Huobi Pool as mentioned earlier. As stated, HPT targets mainly HT holders and community users of Huobi Pool. Users can get HPT according to the hashrate proportion owned among Huobi Pool or receive an airdrop incentive of 20% of the total HPT amount if users hold HT. HPT has a market cap of $24,474,727 and was priced at $0.005511 according to CoinMarketCap on 7th July 2020. As this report will however only focus on HT analysis, we leave HPT for now.

We evaluate HT according to its direct and indirect factors separately.

The valuation of HT token is most directly determined by the following aspects:

1. Huobi’s revenue & cash flow stream that backs HT token

2. HT buyback plan which impacts on markets supply

3. The utility of HT token both internally (within exchanges) and externally which influences the market demand

We will illustrate each point in order as follows:

The major revenue that dedicating to HT token coming from Huobi Global and Huobi Futures.

Huobi is one of the most profound exchanges worldwide. The 24h trading volume of Huobi Global is $1,107,241,666 and is (as of 7th July 2020) offering 556 trading pairs and 230 coins [5]. According to Huobi’s official announcement, the accumulative trading volume (Huobi Global & Huobi Futures) has increased by 78% for the first quarter of 2020 [6]. Below is the one-year trading volume from Huobi between July 2019 to July 2020 according to CoinGecko.

As the information found online relevant to registrations & active users and trading volumes can be tricky. We also looked at the cold wallet storage to measure the dominance and security of the crypto exchanges.

As shown below, on 7th July 2020, Huobi has two (according to BitInfoCharts) or three (according to Chaininfo) cold wallet addresses in balance with their primary calling, holding 250K BTC. Huobi’s on-chain balance dated on 7th July 2020 is 363,705.32 BTC, trailed by Binance (272,223.56 BTC) and OKEX (270,448.86 BTC) [7]. Huobi saw a substantial increase in BTC in balance over the course of 2019. Many suspected that this jump is caused by the huge transaction being processed through Huobi [8], but it remains not clear.

A large cold wallet holding signals a high level of security. Cold wallets are usually used by major exchanges to store reserves and are not connected to the internet, and thus, they are more secure.

Crypto exchanges face every day tremendous amounts of attempts of hacks. Huobi hasn’t had a security accident over the past 7 years since establishment. In year 2019 alone, the market has seen $292,665,886 worth of cryptocurrency and 510,000 user accounts stolen [9]. Unfortunately, as crypto exchanges remain unregulated in most of the countries, there isn’t one regulating agency has jurisdiction over the whole crypto markets to protect customers. Under such circumstances, exchanges often establish insurance funds as a way to counteract the negative impact. Huobi Global launched the investor protection fund in January 2018 for upfront compensation coverage in the event of hacks., It can give users more assurance in extreme cases with fund competency.

Derivatives were originally created out of the need for financial markets and served as a legitimate tool for hedging. According to Deutsche Bank Research in 2019, the Global equities market has surpassed $85 trillion while the corresponding derivatives market size is much bigger. Bank for International Settlements (BIS) reported that the total notional amounts outstanding for contracts in the traditional derivatives market was an estimated $640 trillion, only for the first half of 2019.

Similar are the cases in crypto. Cryptocurrencies are increasingly gaining popularity. Both institutional and retail investors would like to benefit from price fluctuations or hedge against large exposure. Therefore, we see that the derivatives market is booming. According to the exchange review from CryptoCompare [10], derivatives market volume peaked at an all-time high of $600 billion in March 2020. The combined volumes of Huobi, OKex, BitMex, and Binance’s derivatives markets summed up to $514 billion, which take up 86% of the entire market. Though the derivatives market has exploded in recent years, its total trading volume represents approximately only 30% of the market. The increasing market share of derivatives volumes keeps attracting new players to join the force.

Launched at the end of 2018, Huobi Futures has quickly become one of the top cryptocurrency derivatives markets globally. In April this year, Huobi has seen the largest trading volumes with a total amount of $133bn (down 10.5% compared to March) followed by OKEx ($113bn, down 31.4%) [11]. The quarterly report of Huobi suggested that its derivatives trading volumes has risen from $126.7bn in 2019 to $343.8bn in the first quarter of 2020 [12]. Compared with the first full month of operation with a cumulative trading volume of around $12 billion [13], it is a 10x increase of average daily trading volume within 2 years. Obviously, Huobi has an advantage over new derivatives exchanges in capturing a considerable amount of market share within a short period. Its existing traction from the spot market assists to reduce the acquisition cost for new customers. To existing users of Huobi, they will most likely stay as long as the alternative exchanges provide similar settings on trading or they will come back to Huobi when the commission model form alternative exchanges stops concerning liquidity and security.

On March 30, 2020, Huobi launched perpetual swaps to enable users to better hedge risk and to create leveraged arbitrage opportunities in volatile market conditions. The trading platform currently enables 13 swaps. In April, Huobi perpetual reached a trading volume of $50.3bn [14] within one month after launch, while BitMex: the leader in perpetual had a total of $69.3bn [15] in trading volume of the same period in April 2020. Huobi perpetual hit 70% of the trading volume of BitMex after launching one month.

The market has seen a strong need for providing efficient and diversified risk control tools. Newly operated derivatives exchanges are mostly trying to leverage their customized structured products and expecting to take a market share with lower fees, which makes sense as the current fee structure is still high especially for institutional investors. How to effectively attract new customers, provide a cheaper or fixed fee structure, and a distinctive and reliable trading environment might be the key to get some significant market share for both new and existing players.

Therefore, we would also like to mention the downtime incident as it could be a serious reason causing user loss from existing market leaders. Unfortunately, such events appear mostly during market shocks among most crypto exchanges as well as traditional exchanges. Many suspects that exchanges in such situations deliberately freeze the server while publicizing the exchanges with technical problems such as “system overloaded”. This however will lead to price fluctuations, trigger liquidation to the greatest extent, and in the end harm the user’s positions. When such events happen frequently, users will look for alternatives as they usually prefer a secure and user-friendly trading platform. We obviously have no evidence to charge crypto exchanges on this, however, we believe exchanges should upgrade their systems to tackle the collapse with the sufficient capital they hold.

Exchanges typically choose to burn a certain percentage of revenue to return “value” to the token holders. The mechanism usually creates greater scarcity and is deployed by most crypto exchanges as an incentive to hold the platform tokens.

The buyback plan from Huobi is in such forms since 2019 and will most directly influence the supply.

Starting in January 2020, HT’s token burn cycle was adjusted from a “quarterly” to a “monthly” basis. It suggested now that 15% of monthly revenue from Huobi Global and Huobi Futures will be burnt. Another 5% of monthly revenue will be allocated to repurchase and burn a portion of HT Team Incentive Rewards [16].

Below we provide an overview of the buyback & burn mechanism among three trading platforms, Huobi, OKEx, and Binance specifically. The data is according to the announcement of published burn records on each website and the token price is based on Etherscan and CoinGecko.

We notice that Binance initiated this mechanism and followed by Huobi and OKEx. Especially in March 2020, both Huobi and OKEx have decided to further burn a big amount of token besides the amount from its burn mechanism to push its burn ratio up. To illustrate, OKEx burned all unissued 700,000,000 OKB token and this made OKB fully circulated in the market; Huobi burned a total of 147,417,900 HT from a) all undistributed 97,342,300 HT originally allocated to fund platform operations and b) 50,075,600 HT originally allocated to the investor protection fund. As seen from the table below, though the burn source is different among the three trading platforms, the logic behind is the same as to further empower the deflation token model.

*Please note that this amount represents the amount burnt from the revenue in Q1 2020. On March 2020, Huobi burned another 147,417,900 HT from a) all undistributed 97,342,300 HT originally allocated to fund platform operations and b) 50,075,600 HT arising from Q1 and Q2 2018 HT repurchase exercise and other HT platform revenue allocated to the investor protection fund. Source.

**Please note that this amount represents the 7th round of buyback & burn where OKEx uses 30% of transaction fee income from the spot market to buy back OKB and burn. On March 2020, OKEx has burned another 700,000,000 unissued OKB. Source.

***The amount of total burned is until Q1 2020.

****The price of Huobi and BNB is based on Etherscan and OKB is based on OKEx.

*****The price is based on CoinGecko on 17th June 2020.

By deploying the data announced by Huobi Global, we estimated the revenue stream for Huobi from Q1 2019 to the most recent data as follows:

*For monthly and quarterly basis burning, the HT price was UTC 8 AM on 15th every month/quarter (CoinGecko)

**Huobi Global and Huobi DM will spend 20% of its quarterly/monthly revenue on HT (5% for burning team reward tokens)

We accordingly mapped the amount of HT token burned and the estimated revenue based on quarter data:

From the chart above, it can be seen that the estimated revenue is more than tripled in Q1 2020 compared with that of Q1 2019. The token price is almost doubled if we compare the same period.

The utility is another important factor that determines the token value as it directly influences the willingness of holding HT token. The most common utility shared among most crypto exchanges is the discount token model, which implies a certain percentage of transaction fees will be deducted depending on the amount of HT users hold. As trading is the ultimate goal for exchange users, a lower and reasonable transaction fee stands out among peers who provide a similar user experience.

The transaction fee on the Huobi trading platform was fixed at 0.2% and there were two ways to receive a “discount”. Users can either join the rebate privilege program and invite new users and get 30% rebates of their fees or use the pre-paid point card for trading charges. A 1-point equal to 1 USDT fee, however, users can order big packages to receive cheaper point cards. For example, a package of 100,000 points was sold for 50,000 USDT, which is an equivalent of a 50% discount.

By combing the two methods, users can manage to reduce the transaction fee below 0.1%. However, it is complicated and not intuitive, especially with the pre-paid point card. On another note, all point cards have been sold out and it left limited incentive for newcomers to trading big except obtaining point cards through OTC. It is however worth noting that on 24th June, Huobi Global announced the trial of discounted point cards, which will be on time-limited redemption [17]. Huobi explained that the decision was based on feedback from the community as the community hopes to receive preferential services with discounted point cards. The plan was to provide 2 million HT equivalent time-limited discount point cards and only support HT for redemption, which will be locked for one year. The aim is apparently to further reduce the circulation of HT and strengthen the value of HT with future income.

June 2019, Huobi has announced a modified tiered model where users can apply HT token for a trading fee. Both ordinary users and professional users will receive different levels of discount according to the total amount of HT held.

The rules are much more straightforward and easier to conduct than earlier. It also didn’t take long for whales and market makers to realize that they needed to purchase more HT and hold to reach or maintain a favorable discount. On the other hand, as there will be more demand in the market to pull up the price, they need to react fast to stabilize the cost. With the tiered rate plan, it adds a natural lock-up period for users who wants to benefit from the cheaper transaction fee.

Huobi announced the tiered rates plan on 16th June 2019 with a token price of $3.52. One month later, the price goes up to $4.92 and finally arrived at $5.14 at 9th August, representing an all-year high in 2019 [18].

Huobi launched FastTrack, a new voting-based listing process 9 months ago. Users can vote using HT on these projects and the winner will be listed on the same day. The minimum HT position to vote is 1,000 HT. Some of the projects listed through FastTrack are Crypto.com, Akropolis, Fusion, FTX, Carry Protocol, and Harmony.

FastTrack targets at the popular projects that have been listed on other prime exchanges with an active international community. Teams however have to agree to give out 250,000 USDT or more equivalent tokens at a discount of 50% or less of the market price, and the HT obtained in return from the token sold shall be burned. Obviously, Huobi wanted to keep pushing its deflation token model.

First of all, in terms of project selection, FastTrack is for projects that have already been listed and finished the price discovery procedure. Through the discount exchange mechanism, users can anticipate their direct income from participating in FastTrack voting. Their willingness to participate will, therefore, be stronger and this will directly increase the total purchasing volume of HT.

Secondly, the period for users to participate in each of the five projects has been lengthened, from one week in previous Prime Lite to one that in FastTrack to vote four times a month. This means that if the user wants to participate in the entire project voting, the minimum holding time is one month. It encourages users to prolong then holding period and avoid sudden dumps right after the voting period.

As of “vote for listing”, Huobi is one of the first exchanges to implement it and has always tried various voting mechanisms. Back to Feb 2018, Huobi Autonomous Digital Asset eXchange or HADAX for short was launched to let its users vote on the tokens they would like to see listed. Top projects with most votes can be listed on the exchange for free. This model of handing over the rights to users has introduced however various criticizes. On one hand, some projects chose to spend a lot of money to buy votes to be listed instead of focusing on the development. On the other hand, users on average have little information or knowledge to measure the quality of projects and this will lead to more controversial projects crowded on the exchange. Later HADAX was modified in the way that, projects would be recommended by venture capitals and voted by the supernodes.

Until FastTrack, Huobi has also introduced Prime and Prime Lite. We see in common that through all methods, Huobi has been trying to empower HT to different scenarios while taking the overall market, customers, and projects into consideration. We haven’t heard of the news from FastTrack as of October last year. It might be due to the lack of further promising projects and participation from customers, a highly competitive exchange environment, and the overall bearish market. 3.3.3 HT Collateral Deposits

Start from December 2019, users can transfer HT assets from exchange account to the cross-margin account as margin collateral to support margin trades [19]. Users can now collateralize their HT as well to borrow BTC, USDT, ETH, XRP, LTC, BCH, and EOS out. Cross margin trading uses a fraction of assets while aiming at earning a bigger profit. As it goes more popular, it will certainly increase the usage of HT.

Starting from July 2019, Huobi Global and Huobi Pool launched the HT locking & mining operations [20]. Token holders are incentivized to lock their HT to obtain rewards, as all HT owned by Huobi Group will be incorporated into the daily total HPT reward computation.

Users are free to choose to lock HT under flexible extraction, 7 days, 30 days, 60 days, and 90 days with the minimum quantity of 100 HT. Users with locked HT are entitled to two different rewards: HPT rewards and DPOS rewards on that condition that users hold more than 1,000 HPT tokens. The terms give users more flexibility and motivation to lock HT token as long as you are an active user on the platform or confident on the stability of the token price. Users have to bear the market risk that the volatility of HT token during the period goes wild. Locked HT will still be counted towards the computation of tiered fee, though it cannot be used for actual trading fee deductions.

Crypto exchange is one of the few real-world and profitable use cases in the whole blockchain industry. Every time a big movement or decision from the crypto exchange will gather huge traction from the market, such as IEO. It’s not hard to establish use cases within the exchange ecosystem as users have actual practical needs as mentioned above besides simply out of speculation. However, as the utility of various trading platform tokens tends to be consistent, the expansion of the token utility towards external use cases becomes crucial. Though we question the real effect of these tokens in the external scenarios, it requires execution excellence and long-term vision to foster the landing of various real-world scenarios and attract the mainstream.

We summarized here three major indirect factors. Within business expansion, we will focus on illustrating its innovative product plan and Huobi Chain. We will also provide an overview of Huobi to better understand its strategy.

Launched by Huobi Global and deployed on the Ethereum network, Huobi BTC (HBTC)token aims to promote the growth of the decentralized marketplace by injecting Bitcoin (BTC) into decentralized finance (DeFi). HBTC maintains a strict, asset-backed 1:1 peg to BTC. Every 1HBTC issued will be fully backed by the same BTC asset quantity to ensure users can perform a 1:1 exchange between HBTC and BTC at any time [24].

BTC currently dominates 70% of the total market capitalization and its holders will most likely hold it long-term. As a token deployed on the Ethereum network, HBTC is anticipated to inject liquidity in the decentralized marketplace and further promote the development of DeFi ecosystem. Together with Huobi Chain (we will explain later), we see Huobi’s huge bet on DeFi, which has grown to a robust ecosystem covering lending protocols (i.e., MakerDAO, Compound), derivatives exchanges (i.e., dydx, futureswap), and innovative tools (i.e., Flashloan), etc. According to DeFi pulse, the total value locked in DeFi hits $2 billion on 7th July, while it only accounts for around 1% market cap of Bitcoin. BTC has great liquidity on centralized trading platforms and financial services, while DeFi applications on Ethereum in general still lack quality assets as collateral. HBTC could revive this largest asset class and plays a big part in DeFi world.

At the moment, HBTC is working with partners such as dForce, LendF.me, DDEX, Cobo, and Bitpie. Below we compared the active players in the market:

From the chart above, it can be seen that WBTC has the largest supply and has been mostly deployed in the current DeFi community with a total of 2,297 WBTC in circulation. HBTC ranks second at the moment with 710 HBTC within 3 months' launch-time. ImBTC was launched later last year and has been hosted centralized by Tokenlon. Its adoption, however, has been affected by the recent attacks due to the incompatibility between DeFi protocols and its ERC777 standard. Additionally, TBTC was just forced to pause on May 18, 2020, due to a flawed code and the project is waiting for the 3rd round of audits [25]. It is not absolute that a fully decentralized network will be more secure especially when we consider all the DeFi hacks. Together with the Huobi Chain, we think that Huobi will focus on the security matter to scale the adoption of its financial products.

Huobi announced in July 2019 that, they are developing a new public blockchain for decentralized financial services with Chinese blockchain startup Nervos (an investment from IOSG Venture), a technical blockchain partner whose team has contributed to top blockchain projects like Ethereum and imToken. The project is open-sourced in November and has launched testnet. The mainnet is expected to launch in Q2 2020, but it got delayed and the new launch date hasn’t been announced yet.

As per press release, the Huobi Chain will be a regulatory-compliant and high-performance financial chain that allows enterprises, financial institutions, and exchanges to deploy their own blockchains, tokenized assets, and DeFi services. Among other applications, the project will have the potential to host lending services, debit services, stablecoins, security token offerings (STO), and other means of asset issuance as well as decentralized exchanges (DEX).

During the past six years, Huobi has accumulated a lot of experience in the field of cryptocurrency trading, which has given us advantages in terms of understanding blockchains, accumulating key technology, and understanding asset transactions and financial markets.” said Leon Li, CEO, and Founder of Huobi Group. “Exploring public chain technologies and business models both keep us innovative and serves as a strategic defense.”

DeFi is certainly a highly interesting touchpoint, but another aspect worth noting is about compliance. The rapid growth of cryptocurrency usage has led to regulatory inconsistency among jurisdictions across the world and this has given money launderers and terrorists much room to commit financial crimes. On July 21, 2019, FATF (short for Financial Action Task Force) announced that all VASPs (Virtual Asset Service Providers) should be familiar with the Travel Rule and AML compliance obligations that it entails, which suggested that. the originators and beneficiaries of all transfers of digital funds must exchange identifying information. Additionally, the originators and beneficiaries involved in a transfer must be able to guarantee the accuracy of the information they send to the other. Huobi Chain will instead support decentralized identifier (DID) and implement identity protocols such as Know Your Customer (KYC) verification to meet Anti-Money Laundering (AML) requirements and ensure full regulatory compliance. Not only does it provide an advantage over other peers, but also is it attractive especially for smaller VASPs, who are not capable of developing their own solutions. Also, this will allow its enterprise users to issue their own digital assets and launch their own blockchain solutions in a compliant and ‘low risk’ way. Huobi is embracing regulatory compliance as Huobi Chain will allow regulators to take part in the network as validators and plan to work closely with financial enterprises.

Many actually argue that the Huobi chain is similar to Libra as they both promise to offer high-performance financial services and embrace regulatory compliance. There is an obvious difference in that, for example, Huobi’s blockchain focuses on the main trading and decentralized financial services market, while Libra focuses on the payment market.

There has been a wave of the exchange-built blockchain platforms as it helps consolidate their positions and build a moat to avoid being overtaken by DEX for example. On one hand, developing a blockchain allows exchanges to operate without the need of a centralized operator and many operations can be automated through smart contracts. On the other hand, it helps the long tail tokens to be listed and increase transparency.

Let’s take a closer look at the three public chains initiated by Huobi, OKEx, and Binance. Different from Huobi Chain and Binance Chain, who will continue deploying HT and BNB specifically in their public chain ecosystem, OKChain issued OKT as its platform token. OKEx explained the logic as the way that, OKT was created based on the different scenarios as OKB. OKT captures the value of OKChain, while the value of OKB is reflected by the activities from OKEx. Though both tokens are designed to be mutually beneficial to each other, the expected use cases of OKB will be to some degree restricted. Binance Chain is driven by both Binance and the worldwide community according to the Binance website, while Huobi has partnered with Nervos on the development of Huobi Chain.

To the users especially, it is important to understand how the token will be defined in the public chain ecosystem. Huobi planned to introduce HT to various scenarios, for example, staking HT to be a validator and become a supernode. How HT will be eventually integrated, how Huobi Chain gonna add value to the current Huobi ecosystem and interact with each other, will be an important factor influencing the value of HT as well.

In 2013, Huobi was established and achieved a cumulative turnover of over 30 billion RMB.

In 2014, Huobi became the world’s largest digital asset trading platform with a cumulative turnover of over 120 billion RMB and raised investment from Sequoia Capital.

In 2016, the cumulative turnover reached 2 trillion RMB.

In 2017, Huobi expanded in Korea and Japan.

In 2018, Huobi acquired a Hong Kong-based listed company: Pantronics Holding Ltd (01611.HK).

In 2019, Huobi announce a plan for Huobi Chain together with Nervos to build infrastructure for the financial market [26].

As listed, in October 2018, Huobi Group completed the full acquisition of Pantronics Holdings Ltd (01611.HK). In November 2019, Pantronics Holdings Ltd issued an announcement to change the company name to Huobi Technology Holdings Limited to better reflect the company’s future business development. This acquisition, on one hand, will require the company a much higher degree in terms of corporate management, compliance, and disclosure. On the other hand, it makes the company structure more rigorous and transparent.

Huobi Technology Holdings Limited released its first annual financial report as of September 30, 2019. As of September 30, 2019, Huobi Technology’s full-year operating revenue fell 9.6% year-on-year to HK$312 million. For the first time in the past two years, it has experienced negative revenue growth; the net profit attributable to shareholders lost HK$6.076 million, and the number of the same period last year was HK$6.591 million. For the first time since listing, it has suffered a net profit loss of approximately HK$1.989 cents per share. (Huobi explained that the decline in business operations was mainly due to the fact that the original business was the manufacture of hydraulic and electronic components, which has been affected by Sino-US trade war) In addition, Huobi Technology has 672 employees in the fiscal year 2019, which is 139 fewer than last year’s 811 employees, a reduction of about 17%. Huobi Technology did not explain the reasons for the reduction in its financial report.

The Hong Kong Stock Exchange has restrictions on buying shell and packaging business. The company cannot change its original main business within three years. Therefore, the real business of Huobi Technology has not yet been injected. In July 2019, Huobi Technology completed the acquisition of Win Techno Inc., a Japanese blockchain cloud service provider of Huobi Investment Limited, which provides data centers and cloud services. It can be seen that Huobi Technology plans to get rid of the business constraints of the original shell company so as to take the advantage of the current Huobi Group to develop digital asset-related businesses. The founder of Huobi, Leon Li has publicly stated that in 2020 Huobi will focus on Huobi Cloud and Huobi Public Chain. At the same time, Huobi Technology emphasizes technological output and weakens the background of digital currency, which shows the company’s attitude of embracing regulatory trends and compliance layout.

Huobi has recently received widespread attention from the market. As a pioneer cultivator of the cryptocurrency industry founded in 2013, Huobi has a positive and far-reaching impact on the entire cryptocurrency market in China and across the world. Here we would like to share an internal research report with you and everyone is welcome to join the discussion on the future trend of cryptocurrency trading platforms.

We believe that the cryptocurrency trading platforms are positioned crucially in the industry. They have clear cash flow businesses as well as connections with the compliant trading market. In addition, they also drive diverse aggregations of opportunities within the ecosystem. We have seen an increasing number of new cryptocurrency trading platforms within these two years. On the one hand, they serve as liquidity providers for many blockchain projects and connects with the vast community of cryptocurrency enthusiasts, while helping institutions and qualified investors enter the cryptocurrency market; on the other hand, trading platforms are showing a diversified trend in ecological exploration: e.g. Coinbase is planning for its IPO, while both Huobi and Binance have made various significant investments within their ecosystems. The cryptocurrency trading platform gradually becomes a mainstream force that cannot be overlooked. While recognizing the infrastructure and added value provided by these exchanges for the entire cryptocurrency sector, we believe that our research on trading platforms helps us observe the ups and downs of the cryptocurrency world from another perspective.

Our key observations:

1. The value of Huobi will not be limited to HT. We believe that Huobi, will not only enjoy the bonuses brought by the growth of the cryptocurrency market but at the same time also benefit from the large-scale popularization of China’s national sovereign digital currency by focusing on China’s underlying industry blockchain service market and having the opportunity to have a deep-seated intersection with traditional Chinese enterprises and emerging users.

2. Huobi has currently more than 15 Million registered users. Daily active users from Huobi are around 150,000 according to an undisclosed reliable resource. At the same time, institutional customers have seen a jump of more than 100% from Q4 2019 to Q1 2020, contributing to over 50% of Huobi’s trading volume. We can see that Huobi has successfully captured the channels of liquidity through its large-scale user base and its growth in the institutional business, while at the same time actively gaining exposure in the regulatory compliance crypto market. For instance, they have acquired an FSA license in Japan, DAT in Thailand, a DLT license in Gibraltar, and have been providing local currency channels in Turkey.

3. Security is an important criterion to evaluate crypto exchanges. Huobi hasn’t experienced any major hack since 2013. In addition, we measure the on-chain BTC balance as a signal of security. Huobi currently has a subside fund of over $8.7 billion (more than Coinbase). Huobi’s on-chain balance dated on 7th July 2020 was 363,705.32 BTC, trailed by Binance (272,223.56 BTC) and OKEX (270,448.86 BTC).

4. Cryptocurrencies are increasingly gaining popularity and we notice that the derivatives market is booming. According to the exchange review from CryptoCompare, derivatives market volume peaked at an all-time high of $600 billion in monthly trade during March this year. The combined volumes of Huobi, OKex, BitMEX, and Binance’s derivatives markets summed up to $514 billion or 86% of the entire market. At present, the derivatives market still has great potential for development, especially the options market. Huobi will launch the options trading business in the near future. In terms of derivatives exchanges, Huobi has surpassed BitMEX in daily trading volume and is second only to BitMEX in open interest. During the Mar 12th incident this year, its number of margin calls was only 17% of BitMEX’s. Although Huobi Futures could benefit from its existing traction in the spot market, Huobi’s great performance in the futures market was impressive by itself. According to a report from TokenInsight, Huobi’s futures trading volume in Q1 2020 was $438bn, OKEx $417bn, BitMEX $310bn, and Binance $222bn.

5. According to Huobi, HT will be traded in Japan as a compliant asset. It becomes Japan’s 26th compliant token and the first leading platform token recognized by a mainstream financial authority. At the same time, HT will also be allowed to be listed on all compliant exchanges in Japan. It shows that HT has officially entered the mainstream digital asset camp in Japan. In 2018, Huobi Group completed the full acquisition of Pantronics Holding (01611.HK). We believe that Huobi will inject more business lines into this entity. We will also not exclude the possibility that Huobi may keep its both options open for an IPO and its liquid token market. In the meanwhile, Huobi’s other business lines look pretty positive as well, including Huobi’s OTC desk, the fund supermarket, the Huobi Brokerage platform and its effort in securing more licenses in various jurisdictions. In 2019, Huobi China set up its headquarters in Hainan free trade zone and launched a competitive trading platform cloud service and Huobi university education platform, etc. At the same time, we see Huobi’s ambition to be an open platform for the next generation of financial products.

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You can also download the soft copy of this article via http://iosg.vc/pdf/Huobi_Token_Analysis_and_Valuation_-_EN.pdf

[1] https://btc.com/stats/pool/Huobi.pool

[2] https://www.coindesk.com/huobi-cloud-to-offer-white-label-exchange-services-in-middle-east-africa

[3] https://www.huobi.com/en-us/ht/

[4]https://huobiglobal.zendesk.com/hc/en-us/articles/900000269826-Huobi-Token-HT-Tokenomics-Update

[5] https://www.coingecko.com/en/exchanges/huobi

[6]https://huobiglobal.zendesk.com/hc/en-us/articles/900000591306-HT-Operation-Monthly-Report-March-2020-

[7] https://chain.info/exchanges

[8] https://www.theblockcrypto.com/genesis/51084/huobis-role-in-enabling-plustoken

[9]https://cointelegraph.com/news/round-up-of-crypto-exchanges-hack-so-far-in-2019-how-can-it-be-stopped

[10]https://www.cryptocompare.com/media/36934956/cryptocompare_exchange_review_2020_03.pdf

[11]https://blog.bitmex.com/april-2020-report-into-cryptocurrency-exchanges-from-cryptocompare/

[12]https://cointelegraph.com/news/huobis-derivatives-platform-rebranded-as-huobi-futures-to-attract-more-investors

[13]https://www.prnewswire.com/news-releases/huobi-dm-ends-its-first-month-with-a-bang-exceeding-12-billion-in-cumulative-trading-volume-300772902.html

[14]https://huobiglobal.zendesk.com/hc/zh-cn/articles/900000920726-HT%E8%BF%90%E8%90%A5%E6%9C%88%E6%8A%A5-2020%E5%B9%B44%E6%9C%88-

[15] https://blog.bitmex.com/report-into-the-cryptocurrency-exchange-industry-from-cryptocompare/

[16]https://huobiglobal.zendesk.com/hc/en-us/articles/900000180623-Huobi-Token-HT-Token-Burn-Cycle-Change-in-Q1-2020

[17]https://support.huobiservice.com/hc/en-us/articles/900001529346-Announcement-of-Huobi-Global-on-Time-limited-Redemption-of-Discounted-Point-Cards-Trial-

[18]https://www.coingecko.com/en/coins/huobi-token

[19]https://huobiglobal.zendesk.com/hc/en-us/articles/900000039866-Cross-Margin-Now-Supports-HT-Collateral-Deposits-

[20]https://huobiglobal.zendesk.com/hc/en-us/articles/360000344982-Huobi-Global-Launches-Huobi-Token-HT-Lock-Mining-Operations

[21]https://www.prnewswire.com/news-releases/introducing-husd-token-huobis-first-true-stablecoin-300886813.html

[22]https://coinmetrics.substack.com/

[23]https://coinmetrics.io/charts/#assets=husd_log=false_left=CapMrktCurUSD_zoom=1559493648000,1591029648000_stack=true

[24]https://huobiglobal.zendesk.com/hc/en-us/articles/900000196603-Official-Launch-Of-Huobi-BTC-HBTC-On-Ethereum-Network

[25]https://www.coindesk.com/bug-forces-shutdown-of-bitcoin-backed-ethereum-token-tbtc

[26]https://www.huobigroup.com/about/

About IOSG Ventures:

Founded in 2017, IOSG Ventures is research and community-driven with offices across China, the US, Singapore, and Germany. We focus on Open Finance, Web3.0, and cross-chain industry and invest in top potential teams worldwide. Until now, we have over 60 investments and been actively involved in various developer & DAO communities. We believe in long-term partnership and we work closely with our portfolio companies to advise and support them along their journey of entrepreneurship.

First Published on @IOSG Medium on Jul 17, 2020

This report aims to analyze an exchange platform token and illustrate the methodology of how we evaluate it. The crypto exchange industry is one of the few profitable use cases in the whole blockchain industry. It has such a controversial proposition as on one hand, the public’s first impression of the blockchain industry may have come from trading platforms, which can be associated with scams from time to time; on the other hand, it keeps bringing up many new business models and attracting the mainstream to the broad blockchain ecosystem. We recognize the value added to the ecosystem and have seen a fast growth of both their business and the platform tokens.

Tracking the progress of an exchange can be an important angle to observe the rise and fall of the entire industry. Exchanges are extremely sensitive to the needs of their users so to provide up-to-date products and services. In this report, we choose one of the most popular platform tokens to elaborate on its development and growth potential. We added our thoughts on various business sectors and concluded the report with our analysis results.

We hope you enjoy the read.

Huobi is a global cryptocurrency trading platform providing users with spot and derivatives products. After securing investments from notable angel investors and Sequoia Capital etc., Huobi Group quickly captured a large amount of market share and became a top crypto exchange worldwide. Founded in 2013, the exchange used to account for more than 60% of global bitcoin trading before the Chinese government officially banned crypto trading in September 2017. Late 2017, Huobi removed all the trading services away from China and established Huobi Global and opened local trading platforms like Huobi South Korea and Japan. The firm entered the phase of global expansion with the Group’s cumulative turnover exceeding 850 billion USD. In April 2019, Huobi Global’s 24-hour trading volume for spot market reached 1st place according to CoinMarketCap. Huobi has kept its research regulatory compliance arm of Huobi Group, has set up an office in Hainan Free Trade Zone, a frontier where China tests some of the most liberal ideas.

Besides the Huobi Global, with which users are most familiar, Huobi Group has several other prominent business units.

Huobi OTC offers an exchange bridge between fiats and digital assets without trading fees and has been recognized as one of the most user-friendly OTC worldwide. Though its revenue doesn’t directly contribute to HT token burning, it helps the platform reach more users.

Huobi Korea is a professional and convenient Korean won (KRW) -based digital asset trading platform. By adopting a localized operation mode, Huobi Korea has a full-fledged Korean customer service system.

Huobi Japan is one of Huobi Group’s strategic overseas operations. Through acquiring a licensed Japanese cryptocurrency exchange ‘BitTrade’ in September 2018, Huobi Japan has since been able to provide Yen-to-crypto trading services in a legally compliant manner.

Huobi Pool integrates mining and trading services and launched in 2018. The platform is connected to the trading platform, where miners’ earnings can be withdrawn, deposited, and traded on the Huobi exchange or Huobi OTC. The hashrate is currently 3,854.53 PH/s and broke into the seventh spot of the total hashrate share distribution over the last 6 months [1].

Huobi Cloud is a one-stop solution provider for global digital asset exchanges. Huobi has been offering exchange services via its API or a white-labeled cloud service especially in Middle East and Africa. By November 2019, there were 150 platforms under the Huobi Cloud umbrella, plus 80 partnerships deal in the pipeline [2].

Huobi Institution offers professional traders and institutions various high frequency and low-latency trading solutions, such as colocation options, to meet trading demands. It also offers bespoke solutions for instance OTC loan, staking and mining and other one-stop services. Up to date, Huobi Institution’s users contribute up to 40% of overall trading volume.

This report aims to evaluate the Huobi Token; therefore, we will leave out the above business lines as their revenue doesn’t directly contribute to the token value.

We will start with HT token distribution plan and introduce our examine methodology. Next, we will discuss three deterministic factors that impact HT valuation directly, including Huobi’s revenue stream, HT buyback plan, and the utility of HT. We will then talk about the indirect factors, such as the financial products, public chain, and provide an overview of Huobi’s business and its team structure. In the end, we will conclude the report by addressing all crucial attributes mentioned.

HT is short for Huobi Token, which is the Huobi global ecological Token. HT holders shall obtain the corresponding benefits of the whole ecosystem of Huobi and get ecological sub-token rewards, as well as the valuation promotion brought by sustained repurchase and destruction.

To analyze the valuation of HT token, we firstly take a step back looking at its token distribution model.

HT was launched in January 2018 with a total supply of 500 M. Among those,

• 300 M (60% of the total supply) has been given away for free as a benefit for the purchase of “point discount cards”

• 100 M (20% of the total supply) was used for user rewards and platform operation

• 100 M (20% of the total supply) has been reserved as team incentives and subject to a 4-year vesting schedule according to the Huobi official website [3].

HT has a market cap of $968,226,828 and priced at $4.15 according to CoinGecko on 7th July 2020.

In March, 2020, Huobi announced that it will not increase the total supply of HT in the future [4].

It shall also be noted that, there is another token besides HT inside Huobi’s whole ecosystem. HPT (Huobi Pool Token) is issued by Huobi Pool as mentioned earlier. As stated, HPT targets mainly HT holders and community users of Huobi Pool. Users can get HPT according to the hashrate proportion owned among Huobi Pool or receive an airdrop incentive of 20% of the total HPT amount if users hold HT. HPT has a market cap of $24,474,727 and was priced at $0.005511 according to CoinMarketCap on 7th July 2020. As this report will however only focus on HT analysis, we leave HPT for now.

We evaluate HT according to its direct and indirect factors separately.

The valuation of HT token is most directly determined by the following aspects:

1. Huobi’s revenue & cash flow stream that backs HT token

2. HT buyback plan which impacts on markets supply

3. The utility of HT token both internally (within exchanges) and externally which influences the market demand

We will illustrate each point in order as follows:

The major revenue that dedicating to HT token coming from Huobi Global and Huobi Futures.

Huobi is one of the most profound exchanges worldwide. The 24h trading volume of Huobi Global is $1,107,241,666 and is (as of 7th July 2020) offering 556 trading pairs and 230 coins [5]. According to Huobi’s official announcement, the accumulative trading volume (Huobi Global & Huobi Futures) has increased by 78% for the first quarter of 2020 [6]. Below is the one-year trading volume from Huobi between July 2019 to July 2020 according to CoinGecko.

As the information found online relevant to registrations & active users and trading volumes can be tricky. We also looked at the cold wallet storage to measure the dominance and security of the crypto exchanges.

As shown below, on 7th July 2020, Huobi has two (according to BitInfoCharts) or three (according to Chaininfo) cold wallet addresses in balance with their primary calling, holding 250K BTC. Huobi’s on-chain balance dated on 7th July 2020 is 363,705.32 BTC, trailed by Binance (272,223.56 BTC) and OKEX (270,448.86 BTC) [7]. Huobi saw a substantial increase in BTC in balance over the course of 2019. Many suspected that this jump is caused by the huge transaction being processed through Huobi [8], but it remains not clear.

A large cold wallet holding signals a high level of security. Cold wallets are usually used by major exchanges to store reserves and are not connected to the internet, and thus, they are more secure.

Crypto exchanges face every day tremendous amounts of attempts of hacks. Huobi hasn’t had a security accident over the past 7 years since establishment. In year 2019 alone, the market has seen $292,665,886 worth of cryptocurrency and 510,000 user accounts stolen [9]. Unfortunately, as crypto exchanges remain unregulated in most of the countries, there isn’t one regulating agency has jurisdiction over the whole crypto markets to protect customers. Under such circumstances, exchanges often establish insurance funds as a way to counteract the negative impact. Huobi Global launched the investor protection fund in January 2018 for upfront compensation coverage in the event of hacks., It can give users more assurance in extreme cases with fund competency.

Derivatives were originally created out of the need for financial markets and served as a legitimate tool for hedging. According to Deutsche Bank Research in 2019, the Global equities market has surpassed $85 trillion while the corresponding derivatives market size is much bigger. Bank for International Settlements (BIS) reported that the total notional amounts outstanding for contracts in the traditional derivatives market was an estimated $640 trillion, only for the first half of 2019.

Similar are the cases in crypto. Cryptocurrencies are increasingly gaining popularity. Both institutional and retail investors would like to benefit from price fluctuations or hedge against large exposure. Therefore, we see that the derivatives market is booming. According to the exchange review from CryptoCompare [10], derivatives market volume peaked at an all-time high of $600 billion in March 2020. The combined volumes of Huobi, OKex, BitMex, and Binance’s derivatives markets summed up to $514 billion, which take up 86% of the entire market. Though the derivatives market has exploded in recent years, its total trading volume represents approximately only 30% of the market. The increasing market share of derivatives volumes keeps attracting new players to join the force.

Launched at the end of 2018, Huobi Futures has quickly become one of the top cryptocurrency derivatives markets globally. In April this year, Huobi has seen the largest trading volumes with a total amount of $133bn (down 10.5% compared to March) followed by OKEx ($113bn, down 31.4%) [11]. The quarterly report of Huobi suggested that its derivatives trading volumes has risen from $126.7bn in 2019 to $343.8bn in the first quarter of 2020 [12]. Compared with the first full month of operation with a cumulative trading volume of around $12 billion [13], it is a 10x increase of average daily trading volume within 2 years. Obviously, Huobi has an advantage over new derivatives exchanges in capturing a considerable amount of market share within a short period. Its existing traction from the spot market assists to reduce the acquisition cost for new customers. To existing users of Huobi, they will most likely stay as long as the alternative exchanges provide similar settings on trading or they will come back to Huobi when the commission model form alternative exchanges stops concerning liquidity and security.

On March 30, 2020, Huobi launched perpetual swaps to enable users to better hedge risk and to create leveraged arbitrage opportunities in volatile market conditions. The trading platform currently enables 13 swaps. In April, Huobi perpetual reached a trading volume of $50.3bn [14] within one month after launch, while BitMex: the leader in perpetual had a total of $69.3bn [15] in trading volume of the same period in April 2020. Huobi perpetual hit 70% of the trading volume of BitMex after launching one month.

The market has seen a strong need for providing efficient and diversified risk control tools. Newly operated derivatives exchanges are mostly trying to leverage their customized structured products and expecting to take a market share with lower fees, which makes sense as the current fee structure is still high especially for institutional investors. How to effectively attract new customers, provide a cheaper or fixed fee structure, and a distinctive and reliable trading environment might be the key to get some significant market share for both new and existing players.

Therefore, we would also like to mention the downtime incident as it could be a serious reason causing user loss from existing market leaders. Unfortunately, such events appear mostly during market shocks among most crypto exchanges as well as traditional exchanges. Many suspects that exchanges in such situations deliberately freeze the server while publicizing the exchanges with technical problems such as “system overloaded”. This however will lead to price fluctuations, trigger liquidation to the greatest extent, and in the end harm the user’s positions. When such events happen frequently, users will look for alternatives as they usually prefer a secure and user-friendly trading platform. We obviously have no evidence to charge crypto exchanges on this, however, we believe exchanges should upgrade their systems to tackle the collapse with the sufficient capital they hold.

Exchanges typically choose to burn a certain percentage of revenue to return “value” to the token holders. The mechanism usually creates greater scarcity and is deployed by most crypto exchanges as an incentive to hold the platform tokens.

The buyback plan from Huobi is in such forms since 2019 and will most directly influence the supply.

Starting in January 2020, HT’s token burn cycle was adjusted from a “quarterly” to a “monthly” basis. It suggested now that 15% of monthly revenue from Huobi Global and Huobi Futures will be burnt. Another 5% of monthly revenue will be allocated to repurchase and burn a portion of HT Team Incentive Rewards [16].

Below we provide an overview of the buyback & burn mechanism among three trading platforms, Huobi, OKEx, and Binance specifically. The data is according to the announcement of published burn records on each website and the token price is based on Etherscan and CoinGecko.

We notice that Binance initiated this mechanism and followed by Huobi and OKEx. Especially in March 2020, both Huobi and OKEx have decided to further burn a big amount of token besides the amount from its burn mechanism to push its burn ratio up. To illustrate, OKEx burned all unissued 700,000,000 OKB token and this made OKB fully circulated in the market; Huobi burned a total of 147,417,900 HT from a) all undistributed 97,342,300 HT originally allocated to fund platform operations and b) 50,075,600 HT originally allocated to the investor protection fund. As seen from the table below, though the burn source is different among the three trading platforms, the logic behind is the same as to further empower the deflation token model.

*Please note that this amount represents the amount burnt from the revenue in Q1 2020. On March 2020, Huobi burned another 147,417,900 HT from a) all undistributed 97,342,300 HT originally allocated to fund platform operations and b) 50,075,600 HT arising from Q1 and Q2 2018 HT repurchase exercise and other HT platform revenue allocated to the investor protection fund. Source.

**Please note that this amount represents the 7th round of buyback & burn where OKEx uses 30% of transaction fee income from the spot market to buy back OKB and burn. On March 2020, OKEx has burned another 700,000,000 unissued OKB. Source.

***The amount of total burned is until Q1 2020.

****The price of Huobi and BNB is based on Etherscan and OKB is based on OKEx.

*****The price is based on CoinGecko on 17th June 2020.

By deploying the data announced by Huobi Global, we estimated the revenue stream for Huobi from Q1 2019 to the most recent data as follows:

*For monthly and quarterly basis burning, the HT price was UTC 8 AM on 15th every month/quarter (CoinGecko)

**Huobi Global and Huobi DM will spend 20% of its quarterly/monthly revenue on HT (5% for burning team reward tokens)

We accordingly mapped the amount of HT token burned and the estimated revenue based on quarter data:

From the chart above, it can be seen that the estimated revenue is more than tripled in Q1 2020 compared with that of Q1 2019. The token price is almost doubled if we compare the same period.

The utility is another important factor that determines the token value as it directly influences the willingness of holding HT token. The most common utility shared among most crypto exchanges is the discount token model, which implies a certain percentage of transaction fees will be deducted depending on the amount of HT users hold. As trading is the ultimate goal for exchange users, a lower and reasonable transaction fee stands out among peers who provide a similar user experience.

The transaction fee on the Huobi trading platform was fixed at 0.2% and there were two ways to receive a “discount”. Users can either join the rebate privilege program and invite new users and get 30% rebates of their fees or use the pre-paid point card for trading charges. A 1-point equal to 1 USDT fee, however, users can order big packages to receive cheaper point cards. For example, a package of 100,000 points was sold for 50,000 USDT, which is an equivalent of a 50% discount.

By combing the two methods, users can manage to reduce the transaction fee below 0.1%. However, it is complicated and not intuitive, especially with the pre-paid point card. On another note, all point cards have been sold out and it left limited incentive for newcomers to trading big except obtaining point cards through OTC. It is however worth noting that on 24th June, Huobi Global announced the trial of discounted point cards, which will be on time-limited redemption [17]. Huobi explained that the decision was based on feedback from the community as the community hopes to receive preferential services with discounted point cards. The plan was to provide 2 million HT equivalent time-limited discount point cards and only support HT for redemption, which will be locked for one year. The aim is apparently to further reduce the circulation of HT and strengthen the value of HT with future income.

June 2019, Huobi has announced a modified tiered model where users can apply HT token for a trading fee. Both ordinary users and professional users will receive different levels of discount according to the total amount of HT held.

The rules are much more straightforward and easier to conduct than earlier. It also didn’t take long for whales and market makers to realize that they needed to purchase more HT and hold to reach or maintain a favorable discount. On the other hand, as there will be more demand in the market to pull up the price, they need to react fast to stabilize the cost. With the tiered rate plan, it adds a natural lock-up period for users who wants to benefit from the cheaper transaction fee.

Huobi announced the tiered rates plan on 16th June 2019 with a token price of $3.52. One month later, the price goes up to $4.92 and finally arrived at $5.14 at 9th August, representing an all-year high in 2019 [18].

Huobi launched FastTrack, a new voting-based listing process 9 months ago. Users can vote using HT on these projects and the winner will be listed on the same day. The minimum HT position to vote is 1,000 HT. Some of the projects listed through FastTrack are Crypto.com, Akropolis, Fusion, FTX, Carry Protocol, and Harmony.

FastTrack targets at the popular projects that have been listed on other prime exchanges with an active international community. Teams however have to agree to give out 250,000 USDT or more equivalent tokens at a discount of 50% or less of the market price, and the HT obtained in return from the token sold shall be burned. Obviously, Huobi wanted to keep pushing its deflation token model.

First of all, in terms of project selection, FastTrack is for projects that have already been listed and finished the price discovery procedure. Through the discount exchange mechanism, users can anticipate their direct income from participating in FastTrack voting. Their willingness to participate will, therefore, be stronger and this will directly increase the total purchasing volume of HT.

Secondly, the period for users to participate in each of the five projects has been lengthened, from one week in previous Prime Lite to one that in FastTrack to vote four times a month. This means that if the user wants to participate in the entire project voting, the minimum holding time is one month. It encourages users to prolong then holding period and avoid sudden dumps right after the voting period.

As of “vote for listing”, Huobi is one of the first exchanges to implement it and has always tried various voting mechanisms. Back to Feb 2018, Huobi Autonomous Digital Asset eXchange or HADAX for short was launched to let its users vote on the tokens they would like to see listed. Top projects with most votes can be listed on the exchange for free. This model of handing over the rights to users has introduced however various criticizes. On one hand, some projects chose to spend a lot of money to buy votes to be listed instead of focusing on the development. On the other hand, users on average have little information or knowledge to measure the quality of projects and this will lead to more controversial projects crowded on the exchange. Later HADAX was modified in the way that, projects would be recommended by venture capitals and voted by the supernodes.

Until FastTrack, Huobi has also introduced Prime and Prime Lite. We see in common that through all methods, Huobi has been trying to empower HT to different scenarios while taking the overall market, customers, and projects into consideration. We haven’t heard of the news from FastTrack as of October last year. It might be due to the lack of further promising projects and participation from customers, a highly competitive exchange environment, and the overall bearish market. 3.3.3 HT Collateral Deposits

Start from December 2019, users can transfer HT assets from exchange account to the cross-margin account as margin collateral to support margin trades [19]. Users can now collateralize their HT as well to borrow BTC, USDT, ETH, XRP, LTC, BCH, and EOS out. Cross margin trading uses a fraction of assets while aiming at earning a bigger profit. As it goes more popular, it will certainly increase the usage of HT.

Starting from July 2019, Huobi Global and Huobi Pool launched the HT locking & mining operations [20]. Token holders are incentivized to lock their HT to obtain rewards, as all HT owned by Huobi Group will be incorporated into the daily total HPT reward computation.

Users are free to choose to lock HT under flexible extraction, 7 days, 30 days, 60 days, and 90 days with the minimum quantity of 100 HT. Users with locked HT are entitled to two different rewards: HPT rewards and DPOS rewards on that condition that users hold more than 1,000 HPT tokens. The terms give users more flexibility and motivation to lock HT token as long as you are an active user on the platform or confident on the stability of the token price. Users have to bear the market risk that the volatility of HT token during the period goes wild. Locked HT will still be counted towards the computation of tiered fee, though it cannot be used for actual trading fee deductions.

Crypto exchange is one of the few real-world and profitable use cases in the whole blockchain industry. Every time a big movement or decision from the crypto exchange will gather huge traction from the market, such as IEO. It’s not hard to establish use cases within the exchange ecosystem as users have actual practical needs as mentioned above besides simply out of speculation. However, as the utility of various trading platform tokens tends to be consistent, the expansion of the token utility towards external use cases becomes crucial. Though we question the real effect of these tokens in the external scenarios, it requires execution excellence and long-term vision to foster the landing of various real-world scenarios and attract the mainstream.

We summarized here three major indirect factors. Within business expansion, we will focus on illustrating its innovative product plan and Huobi Chain. We will also provide an overview of Huobi to better understand its strategy.

Launched by Huobi Global and deployed on the Ethereum network, Huobi BTC (HBTC)token aims to promote the growth of the decentralized marketplace by injecting Bitcoin (BTC) into decentralized finance (DeFi). HBTC maintains a strict, asset-backed 1:1 peg to BTC. Every 1HBTC issued will be fully backed by the same BTC asset quantity to ensure users can perform a 1:1 exchange between HBTC and BTC at any time [24].

BTC currently dominates 70% of the total market capitalization and its holders will most likely hold it long-term. As a token deployed on the Ethereum network, HBTC is anticipated to inject liquidity in the decentralized marketplace and further promote the development of DeFi ecosystem. Together with Huobi Chain (we will explain later), we see Huobi’s huge bet on DeFi, which has grown to a robust ecosystem covering lending protocols (i.e., MakerDAO, Compound), derivatives exchanges (i.e., dydx, futureswap), and innovative tools (i.e., Flashloan), etc. According to DeFi pulse, the total value locked in DeFi hits $2 billion on 7th July, while it only accounts for around 1% market cap of Bitcoin. BTC has great liquidity on centralized trading platforms and financial services, while DeFi applications on Ethereum in general still lack quality assets as collateral. HBTC could revive this largest asset class and plays a big part in DeFi world.

At the moment, HBTC is working with partners such as dForce, LendF.me, DDEX, Cobo, and Bitpie. Below we compared the active players in the market:

From the chart above, it can be seen that WBTC has the largest supply and has been mostly deployed in the current DeFi community with a total of 2,297 WBTC in circulation. HBTC ranks second at the moment with 710 HBTC within 3 months' launch-time. ImBTC was launched later last year and has been hosted centralized by Tokenlon. Its adoption, however, has been affected by the recent attacks due to the incompatibility between DeFi protocols and its ERC777 standard. Additionally, TBTC was just forced to pause on May 18, 2020, due to a flawed code and the project is waiting for the 3rd round of audits [25]. It is not absolute that a fully decentralized network will be more secure especially when we consider all the DeFi hacks. Together with the Huobi Chain, we think that Huobi will focus on the security matter to scale the adoption of its financial products.

Huobi announced in July 2019 that, they are developing a new public blockchain for decentralized financial services with Chinese blockchain startup Nervos (an investment from IOSG Venture), a technical blockchain partner whose team has contributed to top blockchain projects like Ethereum and imToken. The project is open-sourced in November and has launched testnet. The mainnet is expected to launch in Q2 2020, but it got delayed and the new launch date hasn’t been announced yet.

As per press release, the Huobi Chain will be a regulatory-compliant and high-performance financial chain that allows enterprises, financial institutions, and exchanges to deploy their own blockchains, tokenized assets, and DeFi services. Among other applications, the project will have the potential to host lending services, debit services, stablecoins, security token offerings (STO), and other means of asset issuance as well as decentralized exchanges (DEX).

During the past six years, Huobi has accumulated a lot of experience in the field of cryptocurrency trading, which has given us advantages in terms of understanding blockchains, accumulating key technology, and understanding asset transactions and financial markets.” said Leon Li, CEO, and Founder of Huobi Group. “Exploring public chain technologies and business models both keep us innovative and serves as a strategic defense.”

DeFi is certainly a highly interesting touchpoint, but another aspect worth noting is about compliance. The rapid growth of cryptocurrency usage has led to regulatory inconsistency among jurisdictions across the world and this has given money launderers and terrorists much room to commit financial crimes. On July 21, 2019, FATF (short for Financial Action Task Force) announced that all VASPs (Virtual Asset Service Providers) should be familiar with the Travel Rule and AML compliance obligations that it entails, which suggested that. the originators and beneficiaries of all transfers of digital funds must exchange identifying information. Additionally, the originators and beneficiaries involved in a transfer must be able to guarantee the accuracy of the information they send to the other. Huobi Chain will instead support decentralized identifier (DID) and implement identity protocols such as Know Your Customer (KYC) verification to meet Anti-Money Laundering (AML) requirements and ensure full regulatory compliance. Not only does it provide an advantage over other peers, but also is it attractive especially for smaller VASPs, who are not capable of developing their own solutions. Also, this will allow its enterprise users to issue their own digital assets and launch their own blockchain solutions in a compliant and ‘low risk’ way. Huobi is embracing regulatory compliance as Huobi Chain will allow regulators to take part in the network as validators and plan to work closely with financial enterprises.

Many actually argue that the Huobi chain is similar to Libra as they both promise to offer high-performance financial services and embrace regulatory compliance. There is an obvious difference in that, for example, Huobi’s blockchain focuses on the main trading and decentralized financial services market, while Libra focuses on the payment market.

There has been a wave of the exchange-built blockchain platforms as it helps consolidate their positions and build a moat to avoid being overtaken by DEX for example. On one hand, developing a blockchain allows exchanges to operate without the need of a centralized operator and many operations can be automated through smart contracts. On the other hand, it helps the long tail tokens to be listed and increase transparency.

Let’s take a closer look at the three public chains initiated by Huobi, OKEx, and Binance. Different from Huobi Chain and Binance Chain, who will continue deploying HT and BNB specifically in their public chain ecosystem, OKChain issued OKT as its platform token. OKEx explained the logic as the way that, OKT was created based on the different scenarios as OKB. OKT captures the value of OKChain, while the value of OKB is reflected by the activities from OKEx. Though both tokens are designed to be mutually beneficial to each other, the expected use cases of OKB will be to some degree restricted. Binance Chain is driven by both Binance and the worldwide community according to the Binance website, while Huobi has partnered with Nervos on the development of Huobi Chain.

To the users especially, it is important to understand how the token will be defined in the public chain ecosystem. Huobi planned to introduce HT to various scenarios, for example, staking HT to be a validator and become a supernode. How HT will be eventually integrated, how Huobi Chain gonna add value to the current Huobi ecosystem and interact with each other, will be an important factor influencing the value of HT as well.

In 2013, Huobi was established and achieved a cumulative turnover of over 30 billion RMB.

In 2014, Huobi became the world’s largest digital asset trading platform with a cumulative turnover of over 120 billion RMB and raised investment from Sequoia Capital.

In 2016, the cumulative turnover reached 2 trillion RMB.

In 2017, Huobi expanded in Korea and Japan.

In 2018, Huobi acquired a Hong Kong-based listed company: Pantronics Holding Ltd (01611.HK).

In 2019, Huobi announce a plan for Huobi Chain together with Nervos to build infrastructure for the financial market [26].

As listed, in October 2018, Huobi Group completed the full acquisition of Pantronics Holdings Ltd (01611.HK). In November 2019, Pantronics Holdings Ltd issued an announcement to change the company name to Huobi Technology Holdings Limited to better reflect the company’s future business development. This acquisition, on one hand, will require the company a much higher degree in terms of corporate management, compliance, and disclosure. On the other hand, it makes the company structure more rigorous and transparent.

Huobi Technology Holdings Limited released its first annual financial report as of September 30, 2019. As of September 30, 2019, Huobi Technology’s full-year operating revenue fell 9.6% year-on-year to HK$312 million. For the first time in the past two years, it has experienced negative revenue growth; the net profit attributable to shareholders lost HK$6.076 million, and the number of the same period last year was HK$6.591 million. For the first time since listing, it has suffered a net profit loss of approximately HK$1.989 cents per share. (Huobi explained that the decline in business operations was mainly due to the fact that the original business was the manufacture of hydraulic and electronic components, which has been affected by Sino-US trade war) In addition, Huobi Technology has 672 employees in the fiscal year 2019, which is 139 fewer than last year’s 811 employees, a reduction of about 17%. Huobi Technology did not explain the reasons for the reduction in its financial report.

The Hong Kong Stock Exchange has restrictions on buying shell and packaging business. The company cannot change its original main business within three years. Therefore, the real business of Huobi Technology has not yet been injected. In July 2019, Huobi Technology completed the acquisition of Win Techno Inc., a Japanese blockchain cloud service provider of Huobi Investment Limited, which provides data centers and cloud services. It can be seen that Huobi Technology plans to get rid of the business constraints of the original shell company so as to take the advantage of the current Huobi Group to develop digital asset-related businesses. The founder of Huobi, Leon Li has publicly stated that in 2020 Huobi will focus on Huobi Cloud and Huobi Public Chain. At the same time, Huobi Technology emphasizes technological output and weakens the background of digital currency, which shows the company’s attitude of embracing regulatory trends and compliance layout.

Huobi has recently received widespread attention from the market. As a pioneer cultivator of the cryptocurrency industry founded in 2013, Huobi has a positive and far-reaching impact on the entire cryptocurrency market in China and across the world. Here we would like to share an internal research report with you and everyone is welcome to join the discussion on the future trend of cryptocurrency trading platforms.

We believe that the cryptocurrency trading platforms are positioned crucially in the industry. They have clear cash flow businesses as well as connections with the compliant trading market. In addition, they also drive diverse aggregations of opportunities within the ecosystem. We have seen an increasing number of new cryptocurrency trading platforms within these two years. On the one hand, they serve as liquidity providers for many blockchain projects and connects with the vast community of cryptocurrency enthusiasts, while helping institutions and qualified investors enter the cryptocurrency market; on the other hand, trading platforms are showing a diversified trend in ecological exploration: e.g. Coinbase is planning for its IPO, while both Huobi and Binance have made various significant investments within their ecosystems. The cryptocurrency trading platform gradually becomes a mainstream force that cannot be overlooked. While recognizing the infrastructure and added value provided by these exchanges for the entire cryptocurrency sector, we believe that our research on trading platforms helps us observe the ups and downs of the cryptocurrency world from another perspective.

Our key observations:

1. The value of Huobi will not be limited to HT. We believe that Huobi, will not only enjoy the bonuses brought by the growth of the cryptocurrency market but at the same time also benefit from the large-scale popularization of China’s national sovereign digital currency by focusing on China’s underlying industry blockchain service market and having the opportunity to have a deep-seated intersection with traditional Chinese enterprises and emerging users.

2. Huobi has currently more than 15 Million registered users. Daily active users from Huobi are around 150,000 according to an undisclosed reliable resource. At the same time, institutional customers have seen a jump of more than 100% from Q4 2019 to Q1 2020, contributing to over 50% of Huobi’s trading volume. We can see that Huobi has successfully captured the channels of liquidity through its large-scale user base and its growth in the institutional business, while at the same time actively gaining exposure in the regulatory compliance crypto market. For instance, they have acquired an FSA license in Japan, DAT in Thailand, a DLT license in Gibraltar, and have been providing local currency channels in Turkey.

3. Security is an important criterion to evaluate crypto exchanges. Huobi hasn’t experienced any major hack since 2013. In addition, we measure the on-chain BTC balance as a signal of security. Huobi currently has a subside fund of over $8.7 billion (more than Coinbase). Huobi’s on-chain balance dated on 7th July 2020 was 363,705.32 BTC, trailed by Binance (272,223.56 BTC) and OKEX (270,448.86 BTC).

4. Cryptocurrencies are increasingly gaining popularity and we notice that the derivatives market is booming. According to the exchange review from CryptoCompare, derivatives market volume peaked at an all-time high of $600 billion in monthly trade during March this year. The combined volumes of Huobi, OKex, BitMEX, and Binance’s derivatives markets summed up to $514 billion or 86% of the entire market. At present, the derivatives market still has great potential for development, especially the options market. Huobi will launch the options trading business in the near future. In terms of derivatives exchanges, Huobi has surpassed BitMEX in daily trading volume and is second only to BitMEX in open interest. During the Mar 12th incident this year, its number of margin calls was only 17% of BitMEX’s. Although Huobi Futures could benefit from its existing traction in the spot market, Huobi’s great performance in the futures market was impressive by itself. According to a report from TokenInsight, Huobi’s futures trading volume in Q1 2020 was $438bn, OKEx $417bn, BitMEX $310bn, and Binance $222bn.

5. According to Huobi, HT will be traded in Japan as a compliant asset. It becomes Japan’s 26th compliant token and the first leading platform token recognized by a mainstream financial authority. At the same time, HT will also be allowed to be listed on all compliant exchanges in Japan. It shows that HT has officially entered the mainstream digital asset camp in Japan. In 2018, Huobi Group completed the full acquisition of Pantronics Holding (01611.HK). We believe that Huobi will inject more business lines into this entity. We will also not exclude the possibility that Huobi may keep its both options open for an IPO and its liquid token market. In the meanwhile, Huobi’s other business lines look pretty positive as well, including Huobi’s OTC desk, the fund supermarket, the Huobi Brokerage platform and its effort in securing more licenses in various jurisdictions. In 2019, Huobi China set up its headquarters in Hainan free trade zone and launched a competitive trading platform cloud service and Huobi university education platform, etc. At the same time, we see Huobi’s ambition to be an open platform for the next generation of financial products.

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[1] https://btc.com/stats/pool/Huobi.pool

[2] https://www.coindesk.com/huobi-cloud-to-offer-white-label-exchange-services-in-middle-east-africa

[3] https://www.huobi.com/en-us/ht/

[4]https://huobiglobal.zendesk.com/hc/en-us/articles/900000269826-Huobi-Token-HT-Tokenomics-Update

[5] https://www.coingecko.com/en/exchanges/huobi

[6]https://huobiglobal.zendesk.com/hc/en-us/articles/900000591306-HT-Operation-Monthly-Report-March-2020-

[7] https://chain.info/exchanges

[8] https://www.theblockcrypto.com/genesis/51084/huobis-role-in-enabling-plustoken

[9]https://cointelegraph.com/news/round-up-of-crypto-exchanges-hack-so-far-in-2019-how-can-it-be-stopped

[10]https://www.cryptocompare.com/media/36934956/cryptocompare_exchange_review_2020_03.pdf

[11]https://blog.bitmex.com/april-2020-report-into-cryptocurrency-exchanges-from-cryptocompare/

[12]https://cointelegraph.com/news/huobis-derivatives-platform-rebranded-as-huobi-futures-to-attract-more-investors

[13]https://www.prnewswire.com/news-releases/huobi-dm-ends-its-first-month-with-a-bang-exceeding-12-billion-in-cumulative-trading-volume-300772902.html

[14]https://huobiglobal.zendesk.com/hc/zh-cn/articles/900000920726-HT%E8%BF%90%E8%90%A5%E6%9C%88%E6%8A%A5-2020%E5%B9%B44%E6%9C%88-

[15] https://blog.bitmex.com/report-into-the-cryptocurrency-exchange-industry-from-cryptocompare/

[16]https://huobiglobal.zendesk.com/hc/en-us/articles/900000180623-Huobi-Token-HT-Token-Burn-Cycle-Change-in-Q1-2020

[17]https://support.huobiservice.com/hc/en-us/articles/900001529346-Announcement-of-Huobi-Global-on-Time-limited-Redemption-of-Discounted-Point-Cards-Trial-

[18]https://www.coingecko.com/en/coins/huobi-token

[19]https://huobiglobal.zendesk.com/hc/en-us/articles/900000039866-Cross-Margin-Now-Supports-HT-Collateral-Deposits-

[20]https://huobiglobal.zendesk.com/hc/en-us/articles/360000344982-Huobi-Global-Launches-Huobi-Token-HT-Lock-Mining-Operations

[21]https://www.prnewswire.com/news-releases/introducing-husd-token-huobis-first-true-stablecoin-300886813.html

[22]https://coinmetrics.substack.com/

[23]https://coinmetrics.io/charts/#assets=husd_log=false_left=CapMrktCurUSD_zoom=1559493648000,1591029648000_stack=true

[24]https://huobiglobal.zendesk.com/hc/en-us/articles/900000196603-Official-Launch-Of-Huobi-BTC-HBTC-On-Ethereum-Network

[25]https://www.coindesk.com/bug-forces-shutdown-of-bitcoin-backed-ethereum-token-tbtc

[26]https://www.huobigroup.com/about/

About IOSG Ventures:

Founded in 2017, IOSG Ventures is research and community-driven with offices across China, the US, Singapore, and Germany. We focus on Open Finance, Web3.0, and cross-chain industry and invest in top potential teams worldwide. Until now, we have over 60 investments and been actively involved in various developer & DAO communities. We believe in long-term partnership and we work closely with our portfolio companies to advise and support them along their journey of entrepreneurship.