Author: MASON NYSTROM; Compiler: TechFlow
The superpower of cryptocurrency is the creation of new assets and markets.
Therefore, one of the most common and successful business models in cryptocurrency is the exchange model. If you have been in the cryptocurrency field for a while, this is not surprising, but I think this model is often underestimated when evaluating crypto companies and protocols.
Exchanges can appear in a variety of scenarios, but usually create a trading venue for a certain asset or service and provide a mechanism for processing these transactions.
Today, I try to ask myself a question - how can this protocol or business become an exchange? For some businesses, this is very obvious, but for others, it requires some imagination.
A general rule of thumb is - the closer the application is to the transaction, the more likely it is that the startup application will turn into an exchange. This is intuitive for applications that perform transactions (e.g., redemptions), but it also holds true for applications that are in a privileged position in the stack (e.g., in a value stream) or for applications that start out as SaaS products but can evolve into platforms with strong marketplaces.
Exchanges are best suited for the following scenarios:
New assets appear on-chain
Applications control distribution and can introduce trading behavior
New services emerge, affecting valuable on-chain state or associated with transactions
Crypto games control their own asset issuance and have open economies
Developer platforms can introduce service markets or auctions for trading
When new assets appear on-chain
This is the most obvious scenario for exchanges. Coinbase created a Bitcoin market. Early entrants like Etherdelta demonstrated market demand for trading the long tail of tokens, though late competitor Uniswap became the dominant venue. The same is true for newly created assets like NFTs (e.g., Superrare, Opensea) and derivative assets like stablecoins (e.g., Curve) and perpetual contracts (e.g., Deribit, dydx, etc.).
Of course, not all exchanges will succeed or have similar moats. Some new assets like ERC 1155 or Bitcoin serial numbers are better served by existing exchanges (e.g., Magic Eden) rather than emerging exchanges. Exchanges based on new assets are generally most defensible when they have liquidity network effects, control end-user distribution, or are the privileged issuer of the underlying assets they trade.
Applications that control distribution
Generally speaking, controlling end-user distribution enables applications to upgrade to exchanges. Phantom and MetaMask are wallets, but the advent of MetaMask Swaps has turned all wallets into exchanges. Telegram bots are exchanges, but live in a more convenient place for users — in their direct messages. Social apps like Farcaster, Lens, and Unlonely offer built-in trading capabilities for exchanging assets — like meme tokens, NFTs, points, etc. — at the point of distribution. Similarly, Solana’s blinks now provide a model for any app to implement in-app transactions and become an exchange.
In the future, I expect more distribution-focused apps to provide in-app transactions using primitives similar to Solana blinks, Farcaster frames, or Lens open actions. Historically, web2 apps have been forced to direct users to other platforms to trade, but now that blockchains can offer trading at the point of distribution, it means all apps can become marketplaces.
Markets for New Services
Service providers that influence valuable on-chain state or have some correlation to transactions have the ability to become exchanges. For example, oracles bring external data (such as stock price data) onto the chain, which can affect the on-chain price of other assets, trigger liquidations, or lead to arbitrage, thereby generating instances of oracle extractable value (OEV). Oracle providers like Pyth enter the exchange model by creating auctions that bundle transactions with oracle updates, and let people pay fees for priority processing of transactions. Bridges and cross-chain interoperability services naturally act as exchanges, controlling asset prices in similar ways.
Even more emerging are markets for ZK proofs and services that must be submitted on-chain. As a result, ZK proof markets (such as Gevolut) and aggregators (such as Nebra) will have to compete with transactions and other proof generators for scarce block space. While the field of attestation services is developing, leading providers will benefit from economies of scale (more attestations → more aggregation → cheaper attestations – more attestations), which could make these service marketplaces valuable exchanges.
Crypto Games
One notable difference between Web2 games and Web3 is the shift to an open economy with transferable assets. Since crypto games like Axie typically control the issuance and velocity of assets (e.g., turnover), they can verticalize their own in-game exchanges or otherwise act as asset brokers. This naturally presents an opportunity for web3 games to introduce exchange businesses.
Developer Platforms as Marketplaces or Auction Houses
The case for developer platforms is slightly less obvious, but they benefit from economies of scale and occupy a privileged position in the stack that puts them in close proximity to transactions.
Rollup as a Service providers (RaaS), such as Conduit and Caldera, also have the ability to plug into the value stream by creating their own shard collators, which become the transaction ordering focal point for the RaaS-backed chain. While shared collators can certainly order blocks themselves, they can also auction transactions and capture MEV (miner extractable value).
Another core developer infrastructure is the wallet-as-a-service provider (i.e. Dynamic, Crossmint, Privy), which is able to connect user funds across different applications and provide a sticky user and developer experience. With this lock-in, WaaS providers offer in-app trading, on-and-off exchanges, and possibly similar wallet exchange plugin capabilities.
As the crypto economy grows and all assets move on-chain, we will undoubtedly see more exchanges emerge.
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