TL;DR
The major cryptocurrency exchanges (Binance, Coinbase, and Upbit) that saw big gains during the 2021 crypto bull run are still relying heavily on trading fees for most of their revenue and are working to improve their revenue structure.
Each exchange is taking different strategies, such as expand their trading assets, developing new services, and expanding to foreign markets. However, successful cases are yet to surface.
As the market becomes more competitive, fees will face bigger downward pressure. It is expected that exchanges developing their own blockchain to expand their platform business will emerge as a promising source of revenue.
Trading fees, the bread and butter of exchanges
Among various Web3 business enterprises, cryptocurrency exchanges have emerged as one of the most lucrative business models. Their core source of revenue is "trading fees," and major exchanges like Binance, Coinbase, and Upbit saw particularly large fee revenues during the 2021 cryptocurrency market boom. In fact, about 90% of their revenue was generated from trading fees. However, with the ongoing bear market and decreasing trading liquidity, the fee-based revenue model alone is beginning to be seen as unsustainable. Exchanges are therefore exploring strategic approaches to address this challenge.
Business expansion strategy
Each exchange is making strategic moves to expand their business, which can be categorized into three main areas. 1) increase the diversity of asset offerings, 2) developing new services to explore new revenue streams outside of existing services, and 3) going global to expand the reach of existing services to new markets.
While all exchanges are striving to secure stable revenue streams and improve their revenue structure, they are doing so in different ways. These differences are largely due to the specific regulatory environment of the region in which they operate or the unique strengths of their underlying services.
Binance
Binance, the world's leading cryptocurrency exchange, is making a number of strategic moves to solidify its global leadership.
In response to the growing demand of margin trading, futures trading, and OTC trading, Binance is looking to improve and expand upon its existing services to provide a better user experience for traders. In particular, it is introducing new services such as Auto-Invest and pursuing user-centric feature enhancements.
The BNB chain is one of Binance's core assets. The chain is widely used in a variety of games and services. Furthermore, our research in the Vietnamese market suggests that it is a highly active chain in Southeast Asia, so the revenue structure for dapp development is already in place.
Recently, Binance has been facing various regulatory headwinds, including a lawsuit from the SEC. As a result, it has decided to withdraw from Western markets such as the Netherlands, Belgium, and Canada. On the other hand, the company has announced its intention to actively expand its services in Asia, including Japan, so it is likely that the exchange is going through a stage of reprioritization while responding to the rapidly changing regulatory landscape.
Coinbase
Coinbase appears to be in the early stages of a two-track strategy to capitalize on its platform and expand its services to a wider audience, while responding swiftly to new opportunities.
The exchange is trying out several ways to get users to hold on to their crypto for longer periods of time. ‘Earn’ (Staking) offers interest on crypto assets, while the ‘Borrow’ service offers cash loans with Bitcoin as collateral. In addition, the company is reaching out to a larger trading audience through its ‘Institutions’ service that targets businesses.
The Coinbase One subscription service is a key part of Coinbase's forward-looking strategy. It aims to encourage user activity on the platform by offering benefits such as waived transaction fees, higher interest rates on staking, and access to exclusive information. In addition, its layer 2 blockchain platform BASE, which provides a new dapp development environment, offers Coinbase a strategic advantage in terms of service expansion. This is a logical move for Coinbase as it already has a well-established foundation of wallet, card, and developer APIs.
Coinbase serves over 100 countries and continues to widen its global reach with its recent entry into the Canadian market. Notably, the company is taking a different strategy than its main competitor, Binance, to solidify its position in the market.
Upbit
Considering the limitations of domestic regulations, Dunamu has adopted a safe strategy of focusing on new assets or services rather than existing trading assets. Going beyond the existing stock services such as 'Securities Plus' and 'Securities Plus Unlisted', the company is focusing on the cryptocurrency business centered on 'Upbit'. It provides services such as 'Upbit Staking', which is mainly limited to large crypto assets such as Ethereum that are less susceptible to price fluctuations in consideration of the domestic regulatory environment.
Upbit is also focusing on NFTs. In addition to Upbit NFTs, it also provides Momentica, a service released by Levvels, which is a company established in collaboration with major Korean entertainment company Hybe. Among them, 'Momentica' is a leading platform for fan engagement based on NFTs and is currently available in 93 countries.
In addition, Dunamu is accelerating the development of new services, such as Luniverse, a BaaS platform from Lambda256, and NOVA, a blockchain development platform for Web3 builders. The company also provides services such as Zuzu Legal, RMS, and VIVER, but we have yet to see any noticeable results.
As we discussed in our previous article, Dunamu has exchanges in Singapore, Indonesia, and Thailand. However, this also has not had much of a positive impact on fee expansion, and it's hard to say that the problem of heavy reliance on Upbit trading fee revenue has significantly improved.
Has there been improvements?
Unfortunately, it's clear that the results do not reflect the efforts put in by exchanges to improve their revenue structures, with fees still accounting for a large portion of revenue. However, a fee-based revenue structure has clear limitations. As the market becomes more competitive, exchanges will no longer be able to maintain profitable trading fee rates. The resulting decline in revenue will be a challenge to the long-term sustainability of exchanges.
Many exchanges, especially major ones such as Binance and Coinbase, have had a strategy centered on trading services. However, the time has come to develop new strategies and diversify their business models. Currently, all exchanges are focusing on developing new services based on their own chains, and it is expected that chain-based revenue models will emerge as a major source of revenue in the future.
In addition, it is completely feasible for exchanges to look beyond crypto for new opportunities. Active asset investment, such as establishing web2.0 subsidiaries and making equity investments, will play an important role in diversifying and stabilizing future revenue streams. This should also be considered for the long-term growth and sustainability of exchanges.
