Are crypto trading fees heading to zero?
Also: Can you build the next generation of startups with the current generation's structure?
Welcome to The Late-Stage Review, a relaxed writing project from Alex, a finance and technology journalist. It’s free, comes out when it does, and is made just for you!
This is the first of three posts on the decentralized world.
We’re starting with a dig into crypto trading fees that will lead us to question how well — or not — the structure of modern startups meshes with the web3 world in our second entry. Finally, we’ll talk gaming economics, crypto’s tweaks thereof, and if there’s a future in blockchain games.
Sound good? Let’s have some fun.
The story of Coinbase is not as straightforward as we might think. Yes, the American cryptocurrency platform has had a very good last six quarters, but its ascent comes not too long after a period of declining results.
From Q1 2018 to Q1 2019, Coinbase’s trading volumes fell from $56 billion to just $7 billion. The rest of 2019 and the first half of 2020 were a recovery period for the company. Its fortunes then took flight, with cryptocurrency trading volumes exploding at the company in the last two quarters of 2020 into 2021, pulling revenues higher in their wake.
Notably from 2019 to 2020, Coinbase’s take rate (period trading revenue/period trading volume) stayed nearly static as its total trading volumes rose. In 2019 Coinbase’s trading revenues were worth 0.58% of its trading volumes. That number dropped a single bip in 2020 to 0.57 percent.
Such a modest decline was rather good, I think. 2021, however, changed the dynamic.
Thus far in 2021 Coinbase’s aggregate trading take rate has fallen to 0.41% (Q1-Q3 2021 data), with its weakest known period being its most recent: In Q3 2021, Coinbase collected just 0.33% of trading volume as fees.
More simply, Coinbase’s ability to extract value per dollar of trading volume is falling over time, with the sharpest declines coming in the most recent quarters.
It’s not hard to look at the data and decide that Coinbase is dealing with more, more sophisticated, and better-funded competition than it once did. For consumers this is all very good news — more competition leading to falling fees means more efficient entry and exit to individual crypto positions, and overall lower cost-friction to using crypto.
For Coinbase the news is less good, as the company generates the vast majority of its revenue from trading activity. A lessened ability for the company to extract value from trades at Coinbase would mean that it has to service more total activity to generate a set amount of revenue. So, we should anticipate that Coinbase’s gross margins will erode as its trading take rate falls.
It could be that we’re seeing crypto trading and transaction fees fall more generally. Coinbase is hardly alone in its lack of immunity to market pressure in this regard.
OpenSea is another, notable example. The popular NFT trading marketplace has what appears to be a rather solid, simple, and frankly generous business model. Per the company, OpenSea takes “2.5% of every transaction” on its platform.
Compared to Apple’s extortionate 30% aimed-for take rate, 2.5% feels downright profligate in its consumer-friendliness.
And yet the company clearly knew something that we didn’t, namely that the target fee range is lower for crypto companies like itself; this is partly due OpenSea lacking the monopoly-status that Apple enjoys on the iOS application marketplace, of course. But there’s more.
OpenSea competes with venture-backed rivals, and with platforms that are taking a more crypto-forward approach to building their digital asset marketplaces.
Rarible, for example, introduced its own governance token and gave it away to users to “reward active platform users with a voice on the platform’s future.” This was cool. Creating a way to share more power with users is the opposite of founders and investors giving themselves super-voting shares.
OpenSea has yet to release its own token to reward its users with monetary value through governance rights. That’s not proving very popular, judging by the small encyclopedia’s worth of tweets I have read from the crypto community on the matter.
And then more recently OpenDAO released a token called SOS that was given to, per Decrypt’s notes on the matter, “people who have spent money on OpenSea transactions.” This was a cheeky move by the upstart decentralized org that is still figuring out what it wants to do. But I can’t imagine that directly filling in fee-gaps created by OpenSea’s business model is a method to allow the latter company to charge more over time.
OpenSea, then, like Coinbase, deals with competitors. But while Coinbase is a traditional company allowing for the purchasing of crypto products with fiat currencies, OpenSea is deeper in the web3 mix, if you will. That makes it more disruptable by not only traditionally-funded competitors with a similar model and lower fees, but also by net-new companies like OpenDAO with its recent token airdrop.
There’s precedent for falling fees. The E-Trade generation of online brokers helped lower the cost of trading. Calling your broker to trade was antiquated from, at the latest, the launch of online brokerages.
And then Robinhood took it a step further, undercutting historically discounted trading fees by 100%, offering consumers zero-cost trading in both equities, and, later, cryptocurrencies.
The trend lines in the matter are growing use of technology in retail and institutional trading, and falling fees. Why would that general pattern not hold in crypto, where there’s more tech present than ever?
Thus, our general thesis that crypto trading fees will continue to fall. How far? Quite a ways from present levels, though perhaps not instantly. One particular Coinbase investor told me on that company’s direct listing day that there is value in the exchange’s core tech; that users will pay more fees to leverage all the neat stuff that is offered as part of using the platform. Staking, and so forth. That may hold true for some time. But not forever, if the crypto folks are right.
Speaking of which:
The Crypto Ethos
I’d say that the crypto ethos is towards decentralization by definition. And companies like Coinbase and OpenSea (Delaware and New York based, respectively) are oddly centralized for their business genre.
There’s a natural tension between traditional business structures and the crypto ethos. This means that, if the crypto faithful are correct, and web3 really will shake up the world to the extent they imagine, DAOs should replace traditional corporate structures in time. And especially so, or perhaps especially quickly, for crypto work itself — like operating a trading platform, or running an NFT marketplace.
If you were voting in a DAO that was working to facilitate NFT or crypto trading, you would set the fee structure as low as possible so that you could do crypto things with minimal friction, right?
Crypto trading fees are falling today due to competition amongst a number of companies that often share a traditional corporate setup. NFT marketplaces are being disrupted by the same, and by organizations using more crypto-forward mechanics. The future, then, looks bright for crypto users, if less brilliant for currently established players with venture backing in each space.
Next, we’ll spend more time discussing the crypto ethos, startup mechanics, and traditional corporate structures. If you previously subscribed to The Sunday Essay — the short-lived predecessor to The Late-Stage Review — you can subscribe here for free and get this in your inbox.