Key Takeaways

  • Crypto exchanges have gone from nothing to a relatively mature industry very quickly.
  • The maturation process of exchanges has made them the “apex predators” of the space, engaging in M&A and positioning themselves for entry into the public markets.
  • Recent trends include professionalizing through hiring and regulatory positioning, as well as optimizing their strategies by adding and removing product lines as appropriate.
  • However, there are significant outstanding questions about crypto exchange and there is no guarantee that the maturation will be sufficient to remain independent from traditional financial and technology companies.


State of the Network has predominantly focused on the network and market data happenings of the crypto industry. In this issue, we zoom out a bit to discuss the business trends and strategies of the exchanges building atop these decentralized protocols.

From a standing start in October 2008, the cryptocurrency exchange industry has matured at an astonishing pace. But there is no guarantee that this maturation is sufficient for cryptocurrency exchanges to remain independent indefinitely. 

Below, we explore the maturation of the crypto exchanges through the years.

Satoshi to ~2017

The first challenge for crypto exchanges was how to gain traction in a basically non-existent market. Simply put, could they build a product that early adopters would actually use?

In the early days of crypto centralized exchanges began to emerge, horrifying the hardcore decentralization-focused cypherpunks. Trust is a luxury of optionality and there was almost no competition for any given job-to-be-done. These conditions allowed MtGox to simultaneously have 70% of the Bitcoin market and absolutely no controls upon which users could place their trust. It’s no surprise, then, that the inevitable MtGox hack was a significant event in the history of crypto exchange development and threatened the future of the industry.

MtGox 7-day avg. trading volume before the exchange was abruptly taken offline on February 25th, 2014 

But the hot air gushing into the balloon during the 2017 price run-up brought with it more users, employees, business models, and competition. Users of these crypto exchanges had now been given the Promethean fire of business: choice, and with it, expectations. Those expectations meant that exchanges needed to do more than just build a product which early adopters would use. They also needed to make a product that people would trust. 

~2017 to 2020

Here’s the challenge with trust: it’s expensive and it mainly accrues to the brand, not the product. Thus, exchange’s point of focus shifted from the product to the company: Can you build a going concern; i.e. an actual run rate business?

There are two distinct but interconnected trends occurring today which demonstrate exchange’s strive to capture the hearts and minds (read, trust) of the ever fickle customer: Professionalization and Strategy Optimization. 


The first trend is to win the minds of customers through Professionalization. Regardless of the segment, customers now expect exchanges to act like they’ve been there before

The quickest way to do this is hiring. Visionaries started the crypto industry from whole cloth but the theme now seems to be “professional businesses require professional managers”. And while a first principles re-imagining of the social contract of money has always attracted top talent, now the talent is operating professionals coming in at the top of the org chart, with “traditional world” experience. To name just a few recent examples: Coinbase has hired executives from Barclays, Google, Lyft; BlockFi has hired executives from AmEx and Credit Suisse; Gemini hired a former Goldman Sachs executive to lead their Asia expansion. 

The second approach to Professionalization is acceptance of regulation. True, this was a hand forced by regulators, especially in the U.S., but much of the industry has, in one form or another, turned this into a trust-building competitive advantage. Regulation, and accompanying attestations like SOC audits, appears to have become a marketing positive rather than a negative. Despite it’s well documented flaws, the number of BitLicense approvals is accelerating. International companies such as Binance.US and FTX.US have cleared the regulatory hurdles necessary to enter the U.S. market, typically by registering as an MSB. Luxembourg-based Bitstamp went a step further and got a full BitLicense. BitMEX has announced a User Verticiation (read KYC) program. And unlike many crypto “exchanges” which aren’t, ErisX sought and received a DCO and DCM license from the CFTC, enabling it to fulfill its business model of targeting the institutional market. 

Another critical piece of regulatory acceptance for crypto exchanges is market surveillance to reduce manipulation. Coinbase, Gemini, Bitstamp, Bitfinex, etc all employ some form of market surveillance. However, market surveillance alone is insufficient- at least for the SEC which wants cross-exchange market surveillance sharing agreements before they will approve an ETF. Such sharing agreements are something to keep an eye on for future development.


Source: The Block – NYDFS is granting more BitLicenses than ever before, 8 already this year

Strategy Optimization

If professionalization wins the minds of customers, then strategy optimization is how to win their hearts. The hired guns brought in under the professionalization theme should be, and have been, focused on defining the most compelling value proposition at the most efficient cost; dedicating resources to the key revenue generating areas that make customers happy and reducing funding to those areas which do not. 

The drive for sharper, crisper value propositions has resulted in organizations expanding their product offerings to match customer and prospect needs while, if necessary, simultaneously deprecating unnecessary product lines. To the extent that experimentation remains active, the experiments are part of a strategic framework rather than random flailing. Coinbase shuttered their index/basket product offering shortly before buying Tagomi and Xapo Institutional to round out their institutional product offering. 

And rather than reinvent the wheel, the push for optimized strategies has prompted many firms to mirror the strategies of legacy Wall Street institutions. Numerous players have been scrambling to stand up a prime brokerage offering and, true to the business models of their traditional world counterparts, crypto custodians have been adding lending services

More importantly, these refined value propositions have created sub-segment specialists which have allowed exchanges to outsource necessary but non-differentiated components of their offerings to complementary organizations (sale-leaseback type transactions). The Block and Vision Hill have put together high-quality industry maps for these sub-segments, covering Miners, Exchanges, Wallets, Infrastructure, Data, Investors, etc. Previously, it was not possible for such sub-segments to exist

The quintessential example of this is third party custody (for example, Bitstamp outsourced custody to BitGo) but a more recent example is node infrastructure. Historically, a crypto company anywhere in the value stack needed to operate their own nodes. This is expensive and cumbersome and, above a certain point, undifferentiated. The growth in crypto node infrastructure specialists (HOVA and all) has allowed for this critical function to be outsourced. For example, Coinbase is outsourcing staking to Bison Trails.

A final example of strategy optimization: several large scale traditional fintechs have partnered with crypto exchanges to provide users with access to the crypto asset class, so called “Crypto-as-a-Service”. PayPal and Revolut did such deals with Paxos. At first blush, it’s easy to see why this new product offering and the associated deals make sense: PayPal and Revolut get efficient access to a new market for an existing, captive customer base, while Paxos gets access to the order flow. These deals are a case study in refined value proposition and complementary engagement, both inter- and intra-industry. More importantly, these deals significantly expand the crypto community introducing the concept to millions for the first time. We are almost certain to see more of them. But in the medium term, this type of partnership raises some key questions for the crypto businesses. For example, what is the benefit of Paxos versus, say, Citadel? Is Paxos the best solution for PayPal’s needs or the only solution available at the moment? What is the superior competitive advantage: being the best liquidity provider or having the most crypto knowledge? We explore these questions further in the Questions for the future section below. 

Survival of the Fittest

As you can imagine, this strategy optimization theme has, and will, lead to M&A. We are at the beginning of an M&A shake-out process which will ultimately culminate in two or three high quality survivors in each crypto sub-category.

The most capable exchanges have leveraged their economic dominance to round out their organizations into mature businesses. The strong cash flow gave exchanges the ability to (i) attract capable and expensive hires; (ii) comply with expensive regulations; (iii) expand into new markets; and, critically, (iv) become the primary strategic acquirer in the industry. 

Source: Mapping out M&A acquisitions within the digital asset industry

The M&A-driven shake out has only just begun. As the “apex predator”, much of the crypto industry will need to refine and harden their business models to symbiotically align with, or at least account for, the exchanges or risk obsolescence. 

Source: Coin Metrics Market Data Feed

Questions for the Future

As Yogi Berra said, it’s difficult to make predictions, especially about the future. The craziness of the crypto industry does not make things easier. But crypto exchanges have matured and evolved to the point that there are some known unknowns. 

For example: do retail crypto exchanges want to be brokerages or exchanges? Or maybe more like banks? Does, say, ErisX become the “Nasdaq of crypto” or does ErisX just become Nasdaq’s crypto arm? If retail customers want to buy Bitcoin and Tesla at the same time (they do), what is Gemini’s strategy to obtain the appropriate license? Similarly, if macro hedge funds want to trade Bitcoin along with other asset classes, does a crypto-only prime brokerage make sense? As demonstrated by the PayPal – Paxos deal noted above, are exchanges add-ons to the existing fintechs or do they have independent value propositions?

These questions highlight a textbook example of the Thucydides Trap and this is not the first time a rising business power has faced off against the incumbent. Just as crypto businesses have had to align around crypto exchanges, crypto exchanges themselves may need to make similar adjustments when money center banks and big tech companies fully enter the industry. How crypto exchanges navigate this almost inevitable Thucydides Trap will likely be the defining trend for the industry. 


Cryptocurrencies are a first principles re-imagining of the basic concept of “money”. They are decentralized, without any single point of control. Changes to the protocols are designed to be slow moving and incremental. 

And yet, despite all of that, in less than a decade the crypto industry, and exchanges specifically, has gone from questions of basic product viability to questions of industry-wide competitive advantages against the likes of Google, JP Morgan, and the Federal Reserve itself. 

There are material outstanding questions and significant challenges ahead but the evolution of the industry to date has been remarkable by any measure.