Title: The Current State of Crypto Exchanges: Market Distribution, VC Models, and Future Challenges
Author: shaqima; Source: Author’s Twitter | @Daji_357
In recent times, there have been various opinions on this topic. I have thoroughly considered the flow of funds in the entire financial market and the business models of exchanges and VCs. I will share my thoughts here in a simple and understandable manner, using logical reasoning and examples.
The content can be divided into several major categories:
1. Market distribution of funds and user demographics
2. VC token models and exchange operational logic
3. Why exchanges may not like your project
4. How to overcome challenges in the future? Let’s take a look at past experiences.
To understand why exchanges may not like your project, we must first understand the operational model of exchanges and their role in the crypto ecosystem (financial market).
I. Market Distribution of Funds and User Demographics
The funds in the market can be broadly categorized into primary and secondary markets. If we further divide them, various ecosystems, sectors, and different forms of fund products (NFTs, tokens, inscriptions, runes, etc.) will emerge.
The user demographics can be broadly divided into two categories: domestic and overseas. Since the implementation of certain policies, there are limited options for domestic users when it comes to exchanges. Therefore, for domestic users, exchanges are not begging for their presence; rather, it is more of an attitude of “if you don’t come, you have nowhere else to go.” Moreover, with the wealth effect taking place, people will naturally come.
Of course, there is not just one exchange. Each exchange has found its unique core competitiveness in the market. Some focus on security, some on building and promoting new ecosystems, some choose to support secondary assets that top exchanges overlook, and others compete for a share in the primary market.
Therefore, from the perspective of exchanges, disregarding the form of assets, we can classify projects as follows:
C: Ordinary assets in the primary market (uncertain risks, require research, understanding, and decision-making)
B: Good assets in the primary market (potential with risks, analyze their benefits before making a decision)
A: Excellent assets in the primary market (backed by outstanding endorsements, lower risks, and certain returns)
Therefore, everyone wants A-class assets, exchanges choose B-class assets, and C-class assets are usually overlooked. If we use an analogy, A, B, and C can be compared to students, and exchanges can be compared to top universities, regular universities, and colleges respectively. Excellent students bring benefits to universities, and they are naturally welcomed. Even if you are not excellent but have connections that can bring value to the university, you are still welcomed. As for average students who can afford tuition fees, we can still accept them because universities also need to make money. However, there are limited spots, but don’t lose hope, there are other universities that are more welcoming. As for students with poor academic performance, even if you pay money, there is a risk of disrupting the university’s reputation. If you bring disgrace to the university, it will not be worth it. It’s better for you to go to a college. There will always be schools that are not afraid of risks and want to make money from your tuition fees. This forms the threshold. Therefore, project teams also have to go through an evaluation process.
Of course, these are the visible aspects. What are the hidden operations?
If you have an “overseas identity,” even if you have average grades and average capabilities, if you come to my university, it can make my reputation spread overseas. Naturally, you are also welcome.
Therefore, in the current financial market, projects dominated by domestic users rely on their capabilities to attract attention. If they don’t want to attract attention, they have to rely on their background and connections. After all, the domestic market is already saturated, and I am not afraid that you won’t choose me because you have nowhere else to go. On the other hand, for exchanges, the overseas market is a major revenue source. Projects with high popularity in the overseas market can bring in overseas users, and if they can make them stay, exchanges can continuously expand their revenue.
From this, the connection between user demographics and funds becomes clear. If we go deeper, when a new narrative emerges, we first look at the proportion of user demographics. If the project is mainly targeted at overseas users, they will be given priority and the threshold can be lowered. Even if they don’t bring in revenue, as long as they can bring in users, I can make money from them in the future. If the project is mainly targeted at domestic users, it depends on their capabilities and strengths. If the narrative is innovative enough, we are not rigid people; we will praise it, but conditions are still necessary. When your ecosystem becomes large enough and profits become substantial, we can discuss “cutting” deals.
Therefore, in a condition of hope without fear, everyone hopes for quality over quantity.
Having discussed the external environment, let’s now look at the internal structure.
II. VC Token Models and Exchange Operational Logic
To make it easier to understand, let’s start with ordinary projects rather than ones born with a silver spoon. Once a narrative is established, the goal is to survive in the market, which requires traffic. At the beginning, when there is no popularity, data is needed to support one’s “dignity.” Therefore, during the initial stage, everyone starts from the same starting line.
When you achieve some success, influential people will extend an olive branch to you. If your own conditions are not strong enough, it will be difficult to go it alone. You need to join forces.
At this point, your basic traffic will start to expand through these influential connections.
When the traffic reaches an ideal stage, you become eligible for top-tier exchanges.
Then, it’s time to talk about returns because, in the end, who will invest in a project without money?
Starting with 100% ownership, you share a portion with influential connections and another portion with top-tier exchanges. But, oh no, when you reach into your pocket, you realize it’s not enough to share with those brothers who supported you when you had no fame!
What do you do then? The witch is a good thing.
“Recently, the frequent occurrence of so-called witch events in the crypto field is really a joke to endure.”
Therefore, in the above logic:
– Project teams play the role of technical ideation and implementation (although there are some ancient times when money was made solely based on ideas).
– VCs play the role of matchmakers. They must help you gain attention, provide funding when you are short of money, and use their connections to create influence for you.
– Exchanges play the role of traffic amplifiers (liquidity). Project teams earn profits from their own entrepreneurship through technology and ideas. VCs earn profits through their connections and resources, acquiring cheap tokens. Exchanges acquire tokens through their traffic, exchanging them for cheap tokens.
Once the tokens are allocated, the next step is how to sell them better (this is similar to market makers but with a similar logic).
After discussing VCs, let’s look at exchanges:
Exchanges were founded early on by entrepreneurs who built a convenient trading environment through technology. They simplified the complexities of the primary market and reduced perceived risks.
Once the technology is in place, they need users. In the early stages of survival, they need various project teams to bring in users and conduct subsidy activities to attract and retain users, making their platform popular.
One day, they realize that everyone in the village is playing in their field, and there are no other fields for miles around. Naturally, they don’t need to promote themselves too hard.
The next question to consider is how to attract visitors from further away.
Therefore, fundamentally, everyone is creating their own pond within the market. When their wings are fully grown, they naturally become protective of their feathers. In other words, how can the vegetables you grow be taken away by others?
III. Why Exchanges May Not Like Your Project
It is often necessary to abandon the view that your own child is always good. Many times, most projects fulfill the requirement for traffic but not for profitability.
As the saying goes, “a good reputation comes from a famous teacher.” Even exchanges require a good endorsement.
Let’s examine a project from the perspective of an exchange:
1. Is the traffic large enough? If your traffic is exactly what I want, then it’s easy to negotiate. If it’s only a small amount, then we need to consider other factors.
2. Can you bring profits? Trading volume is the ultimate consideration for an exchange, but it is reserved for projects with large traffic. Direct profits are the most real. If the exchange cannot see money, why should it provide traffic in exchange for liquidity? If you take the money and run, the exchange is left with nothing. Therefore, chips or money, that’s what matters.
“Huang Lao Ye, if the money doesn’t come, how can we fight the bandits?”
Therefore, even for projects that cause a big stir, exchanges can still support them for free to boost their dreams. Why would they invest their own money into supporting your dreams?
In the end, everything comes down to interests. The visible rules are often used to manipulate people, while the hidden rules are used to get things done.
You may think your selected project meets all the requirements, but in reality, it’s just a big dream. Moreover, it is important to objectively evaluate the project’s advantages from a realistic perspective, rather than assuming that all foreigners are the same. That’s self-deception.
IV. How to Overcome Challenges in the Future? Let’s Learn from Past Experiences
The market is a product of buying and selling behavior, and exchanges simply simplify the path of this behavior, allowing them to get a share of the pie. When the user base is large enough, the profits naturally increase. However, the market is never an infinitely large cake, so exchanges cannot monopolize the entire market. This is the norm.
When things develop to a certain stage, they will always face challenges in the current stage.
Binance’s current style may not be of interest to me, but it is true that Binance is facing bottlenecks. As exchanges innovate, seek profits, and ensure security, they cannot achieve all three simultaneously.
In the current highly challenging environment, even Binance cannot completely monopolize the market. On one side, there are risks; on the other side, there is a game of upward profits. Additionally, there is a competition for traffic. There must be trade-offs.
Based on the current situation, compliance and security are likely Binance’s top priorities, which may lead to a loss of vitality and innovation.
In the emerging MEME market, fairness and decentralization are the main selling points. However, this also means that many roles in the existing ecosystem food chain are replaced. This chain cannot operate under the previous model, which calls for innovation.
This is not the first time such a situation has occurred. In 2021, BYAC, as an emerging NFT product, played more of a role in the first half of the frenzy, with exchanges following the trend.
Therefore, in this emerging market, platforms like Opensea have emerged.
The market’s rules cannot be fully controlled by individual entities. Therefore, in the current stage, whether it’s a pump or Uniswap, these platforms play a significant role in the new cycle.
In the future, more emerging assets will bypass these so-called leading platforms and shine on their own. When they have sufficient traffic, token assets will return to these platforms to collectively promote the entire ecosystem.
Binance is no longer a small boat at this stage; it has become a stable giant. However, a giant ship does not diminish the value of small boats.
Therefore, in the current stage, MEME or other emerging trends provide opportunities for more small boats.
With this opportunity, more giant ships will emerge. Ultimately, even if the MEME track deprives traditional VC token models of their role and becomes less favored by exchanges, it doesn’t mean that MEME itself cannot have its own exchange. Everyone has different standards for excellence, and in a market with diverse demands, more opportunities will arise when the demand is significant.
NFTs, pumps, BRC20, and Rune will not be rejected just because Binance refuses them. The vast historical tide includes exchanges as mere passersby. Binance has achieved great feats in a few years, which means there will be successors.
The current challenge is a dilemma, but for exchanges and teams with ideas, it is also an opportunity.
The downfall of any giant ship is a heavy blow to the industry, and everyone has to pay for it. There is no need to destroy it; we can only say that with upgrading and development, many people are no longer its target customers.
But it doesn’t mean that this market no longer exists.
Binance still has core competitiveness in terms of large capital withdrawals and security.
When it can no longer meet everyone’s expectations of “driving the industry,” naturally, other rising stars will appear.
Sometimes the catfish effect can stimulate industry development.
From an ecological perspective, Binance cannot stop the operation of cycles. From the perspective of individual investors, maintaining consistent trading logic with exchanges can still achieve desired profits.
We look forward to the emergence of a bright solution to the current challenges.
