If Cryptopia doesn’t unlock incentive structures for $DOT they will be relinquished to a low-level blogging site owned by Binance…
Or flounder and go bankrupt. Or get acquired for pennies on the dollar. Or do something else that will ultimately be synonymous with lose.
I say this because we can compare the lifecycle of the crypto-exchange industry to that of a like-industry, DFS (daily fantasy sports), in order to predict how the crypto-exchange world might unfold.
If the two industries are remotely similar, the crypto-exchange business will be a winner-take-all system with most exchanges failing in the long-run. In order for Cryptopia to be one of the few remaining exchanges, they need to win the land-grab for transaction volume by unlocking features of their $DOT coin.
For the duration of this paper, we’ll explore (I) what happened to Cryptopia-esque companies in the DFS industry, (II) the lessons that can be applied to the crypto-exchange industry, and (III) how Cryptopia can action the lessons.
(I) THE DFS INDUSTRY
Before we dive in, let’s quickly put the crypto-exchange industry into perspective. For starters, the DFS industry has had, at most, 100 competitive companies throughout its lifecycle, and they are all competing for a slice of, liberally estimated, a ~$7 billion industry*.
Compare that to the crypto-exchange industry which has over 500 companies, all competing for a slice of, conservatively estimated, a $25 billion pie**. This means that as big and competitive as the DFS industry is/was, in comparison, Cryptopia is playing at a high-stakes poker table with Putin while the DFS companies are playing BINGO in a nursing home.
**Coinbase has ~10% of the market share and was last valued at $1.6 billion in August 2017. They have since exceeded their revenue expectations on the year by ~66% causing some experts to estimate that their valuation has since 2x’d. To be conservative, I assume their valuation 1.6x’d to a total of $2.5 billion. With Coinbase accounting for ~10% of the market share, the total market can be estimated to be $25 billion.
So with that out of the way, why is the DFS industry a good benchmark for the crypto-exchange industry anyways?
Aside from the obvious of both being web-based etc. etc., they have highly-similar fundamental market characteristics:
1) Low barriers to entry.
a. Relatively easy and cheap to start both a DFS site and a crypto-exchange.
2) Commoditized product, or put another way, few differentiating factors among competitors.
a. This is where things don’t line up exactly 1:1, but they line up well enough for the comparison to hold weight. Each DFS site offers a similar set of games with only a slight variation from site to site. Likewise, each exchange offers a similar product (crypto pairs) with specific pairs varying a bit between each exchange.
— Yes, I get that decentralized exchanges will be a game changer, but we’ll just hold that aside for now.
3) Fee-based revenue model (straightforward enough).
Okay, great, so what did the lifecycle of the DFS industry look like?
The DFS industry can crudely be mapped out to look something like this:
It’s a winner-take-all / rich-get-richer system to the extreme as the top two DFS companies collectively own > 90% of the market share***.
So how did the winners win?
DraftKings and FanDuel are the clear-cut winners (own > 90% of the market share).
They came to dominate the market by winning the land-grab phase of the industry with aggressive referral and incentive programs that looked something like this:
That’s simple enough, but what happened to everyone else?
They lost. The list of losers is long, but a few include Fantasy Aces, FantasyHub, and FantasySportsLive. They either failed to recognize the highly competitive environment they were playing in (what I think is the case with Cryptopia), or they were just not aggressive enough and ended up bankrupt (Fantasy Aces) or bought-out (FantasyHub).
It’s also very important to note that neither DraftKings nor FanDuel were the first company in the space — they simply understood the stakes and had the right strategy during the land-grab phase. One of the original DFS sites, FantasySportsLive, didn’t do enough to compete and lost market share to DraftKings and FanDuel. Ultimately FantasySportsLive was bought-out and now serves as the blog section for the parent site which has also been struggling to sustain market share.
A more comprehensive breakdown of losers is included at the bottom of this.
(II) LESSONS FOR THE CRYPTO-EXCHANGE INDUSTRY
How does this relate to crypto-exchanges?
With 500+ active exchanges, the crypto-exchange industry has passed the companies enter phase, and is firmly in the land-grab phase. This phase only happens once in the industries’ lifecycle and it’s crucial to gobble market share now as the consequences for not doing so are enormous.
The winners of the crypto-exchange game will dominate transaction volume because Transaction Volume = Market Share. Exchanges like KuCoin and Binance know that this is the land-grab phase of the industry and are acting accordingly [KuCoin’s spells this out in their whitepaper].
Like DraftKings and FanDuel, KuCoin and Binance are currently using tokens to unleash aggressive referral and incentive programs that increase their transaction volumes:
- $KCS (KuCoin Shares) holders receive a proportional share of 50% of daily trading fees
- $BNB (Binance Coin) and $KCS holders receive discounted transaction fees (upwards of 50% discount)
- Binance and KuCoin have extremely lucrative referral programs
Some of their incentive programs look like this (note similarity in incentives as compared to those offered by DFS sites above):
Other examples of exchanges also using their own token for incentives include Bibox, BigONE, and Bitshares Asset Exchange.
Okay, so how does this compare to Cryptopia?
Great question, well Cryptopia has:
1) No referral program
2) No discounted trading fees
3) Poorly constructed revenue share program:
a. $CEFS (Cryptopia Fee Shares) = 4.5% of exchange fees are shared proportionately with $CEFS holders
4) Poorly constructed reward system:
a. Funded by donations (wtf) and rewards random actions on their site (commenting, transacting, etc.)
5) A utility coin with nearly no utility
a. $DOT coin = Companies that want to get their token listed on Cryptopia must pay a fee in $DOT (fee varies based on price of $DOT). Other advertisement packages must also be paid in $DOT, but there is not real value to the holder other than pure speculation.
The comparison is crudely summarized in this table:
(III) HOW CRYPTOPIA CAN WIN
To my best estimate, Cryptopia has only two options for success during this land-grab phase.
Option 1: Make their exchange so much (a.) cooler, (b.) cheaper, or (c.) different than other exchanges that people have no choice but to use Cryptopia.
a. Cool: not quite Cryptopia’s thing.
b. Cheap: this a dangerous game as any exchange can simply undercut their fees and then they are in a race to the bottom (happened in DFS).
c. Different: this is their current value-add; tons of altcoins. You go to Cryptopia to buy a coin no other exchange has; problem is most are shitcoins. So what happens when a major crash takes place and the shitcoins go to zero? Or for the more optimistic folk, what happens when ten other exchanges decide to offer all the same coins as them? Why use Cryptopia then? To buy something on their Web 1.0-version of a marketplace?… Don’t think so.
Option 2: Create an incentive program that makes it in their users’ best interest to join, trade, and refer (remember; Transaction Volume = Market Share).
a. Join, Trade, and Refer: Why join Cryptopia? Why make trades on Cryptopia once you join? And why convince others to join? The easy answer is incentives. Imagine if they offered you the ability to trade with reduced fees and earn a percent of all fees/revenues collected daily? Well, sounds like you might sign up and start trading because it is in your best interest. Additionally, what if they offered you the ability to profit by referring your friends? I’d reckon that you might just go ahead and refer your friends. Not rocket science, just a model proven to be effective by those that won the DFS world, and a model currently being used by big players in the crypto-exchange industry.
So… Cryptopia doesn’t need to reinvent the wheel. They can simply copy the DraftKings/FanDuel model which is most aggressively implemented in the crypto-space by $KCS. Here’s how:
Roll up $DOT and $CEFS into one coin ($DOT makes most sense to use here) [more on that here] and then copy/paste the $KCS model:
- Revenue share of daily trading fees (50% of daily fees are split with $DOT coin holders)
- Discounted trading fees by hodling $DOT
- Referral reward system
Are there other problems that Cryptopia needs to address as well (customer service response times, technical issues, leadership transparency, etc.)? Absolutely.
BUT, there is only one time in this industry’s lifecycle for a transaction volume land-grab, and that time is now. AND the only proven way to be competitive is to initiate aggressive referral and incentive programs during this land-grab phase. Cryptopia can do so by unleashing their $DOT coin just as other top exchanges have already done.
If Cryptopia does this, they might have a chance to still be a player in five years.
If Cryptopia doesn’t do this, they are nearly certain to go the way of FantasySportsLive where if they are lucky, they can be the New Zealand blog section for Binance.
— — — — — — — — — — — — — — — — — — — — — — — — — — —
More info on DFS Losers:
1) Fantasy Aces declared bankruptcy; as best I can tell they are still sorting that out.
2) Some other DFS sites that shut down:
3) Some DFS sites that were acquired (note that most were either bought by DraftKings, DraftDay, or Fantasy Aces. DraftDay [site that acquired FantasySportsLive] was acquired by MGT who later sold it to Viggle seemingly because their burn rate was high****. And again, Fantasy Aces later declared bankruptcy… Not a rosy outcome for most players in the space):
Disclaimer: I currently own ~$200 USD worth of $DOT and have no plans to exceed $1000 USD of total investment in this bag. As such, I certainly have incentive for $DOT to moon, but I’m not poised to get a life-changing amount of money if it does. I think that makes me bias enough to be critical but not enough to be blind.