Opinion by: Hendrik Ghys, co-founder and CEO of Thalex
What is stopping blockchain networks or crypto platforms from becoming super brands? In theory, nothing. That’s why you frequently hear industry chatter about how plateaus in adoption are temporary embarrassments due to macro-market factors or audience mismatches.
A great brand is not defined by awareness alone but by customer captivity. This core insight comes from Competition Demystified by Bruce Greenwald. In answering the question of how to build a captive customer base, Greenwald suggests playing to at least one of three core tenets of demand-based competitive advantages: habit, switching cost and search cost.
Many crypto companies, namely exchanges, that are well on their way to becoming household names have a distinct advantage here: They embody all three. They are super brands in the making.
Separate starting points
Super brands in traditional finance didn’t reach their status overnight. Market leaders in fiat banking and trading have developed over decades. Crypto exchanges don’t get a shortcut here, but they have distinct characteristics based on how and why they were created.
Crypto’s inception was that of a borderless currency built for the internet by the internet. The crypto community was global from day one — a far cry from the traditional financial industry’s localized, geographically bound and hierarchical structure.
Crypto exchanges were built to welcome users from anywhere worldwide, uninhibited by regulatory restrictions. There is no New York or London Stock Exchange in crypto.
The most critical driver of customer captivity is habit — those who use a product without thinking twice or considering the competition. In the early days of crypto, habit formation was limited. The space innovated too quickly, and customers looked for new exchanges that would be quickest to list new coins.
That stage was followed by competition for leverage, first with margin trading and ultimately with perpetuals. Once perpetuals started to dominate as the preferred instrument to trade and stablecoin settlement opened up the path to altcoin perpetuals, habit formation became a significant competitive advantage.
As trading volume and customer bases grew, so did regulatory intervention and the widespread implementation of KYC protocols for onboarding. This evolution raised switching costs among exchanges and introduced friction to trying new exchanges or products.
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Regulations impose restrictions on marketing, which increases search costs for challenger brands beyond the disadvantage of scale. Constraints like these drive the concentration of “top-of-mind” awareness into a handful of exchanges.
There is an analog to the tobacco industry here. When regulations were enacted on how cigarettes and other tobacco products could be advertised, big brands slashed their marketing budgets and effectively all retained whatever market share they managed to obtain. They all simply became more profitable.
Unless a competing exchange offers something simply too good to ignore, most traders or crypto holders aren’t bothered to DYOR and transfer funds. That’s similar to how traditional financial services retain customers for generations. Switching banks is inconvenient, and most people won’t do it if they don’t need to.
Essentially, there needs to be both a pull and a push. A new exchange has to stand out and offer something substantially new and better. In contrast, a leading exchange has to get complacent and anger a customer enough to energize them into paying the switching and the search cost.
Here’s where we enter the exchange paradox. Suppose on an average day, leading exchanges keep growing thanks to their customer captivity combined with massive economies of scale and scope. Why have the top three exchanges changed roughly every three to four years?
The exchange paradox
A core issue with top exchanges is that it’s hard to scale technology and innovation once a company reaches a certain level of growth. So, while it may be easy for brands to get big, their position at the top is tenuous — and their potential to transcend to a super brand is even shakier.
Competition can and will eventually eat into market share. What we’ve seen happen with crypto exchanges is that their organizational structures become too complex, leading to companies losing their entrepreneurial edge and spirit.
Likewise, big brands in relatively new sectors become significant targets for regulators. This regulatory attention isn’t unique to crypto exchanges, but we have seen massive brands like Binance be targeted by regulators globally. No one wants to be made an example of, so a brand might find it helpful to try and fly under the radar rather than attract attention.
What newer, smaller and nimbler exchanges can do, however, is quickly pivot to offer new products that leading exchanges can’t provide. When exchanges get too big, their UX can start to deteriorate as client demands shift and new use cases emerge that users would like to incorporate into their strategies.
That’s how, in 2019, Deribit became a dot on the map. Deribit was around for years trying to bring life to crypto options markets before launching a perpetual that iterated on the design of BitMEX.
When BitMEX started suffering frequent system outages, which often led to customer liquidations, this resulted in large-scale customer dissatisfaction and fueled many customers with the energy to overcome switching costs and search costs and try out Deribit. The volume that developed in perpetuals created the foundation for Deribit to become successful in options.
Once a smaller exchange “cracks the code” on what will drive users away from leading exchanges and entice them to pay the switching and search costs, they can scale quickly and start consolidating success.
By breaking the habit factor that leading exchanges build with their user base and offering enough reasons for them to search and switch, competitors can grow their footprint exponentially. Once they reach the top, however, the “exchange paradox” comes into play, and the cycle begins anew.
For an exchange to break this cycle and become a super brand, it has to create a network effect that plays on habit, switch and search costs to their advantage. Retaining an entrepreneurial and innovative mindset is critical here, as those are the keys to staying ahead of competitors. Likewise, remaining proactive on regulation rather than adopting a “too big to fail” attitude can help shrink the targets placed on the backs of market leaders.
No brand is invincible. Trust and habit are built on a millimeter-by-millimeter basis, so it’s up to exchanges to internalize this and move forward with that approach to win new users and keep them engaged.
Hendrik Ghys is co-founder and CEO of Thalex. Having transitioned to the crypto sector in 2017, Hendrik was instrumental in negotiating the acquisition of Bitstamp and served as chair of its board post-acquisition.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.