Juncheng Zhang


The Economics Behind ShapeShift’s Membership Backpedal

One of the oldest crypto exchanges finally capitulates to industry late-comers’s rule book.

The fiercely competitive cryptocurrency exchange business finally welcomed the inevitable backslide of one of the oldest and certainly prestigious exchanges in what appears to be a sellout of the decentralization ethos. Since the blog post earlier this week, the CEO of ShapeShift.io, Erik Voorhees, has been lambasted for the new KYC membership program, which would require the exchange’s users to pass through KYC if they want to trade in larger volumes and grant certain benefits for those who sign up. The decision was further heated when Andreas Antonopoulos called ShapeShift a “centralized entity” that deploys “surveillance economics”, a supposed opposite of what a crypto exchange ideally is.

The expected response from within the industry to these criticisms is well expected — since the crypto space is such a new industry, there’s always some time before the law catches up to the rapid progress. The membership program, from the regulatory perspective, is of course understandable. On the other hand, it marks ShapeShift’s initiation into the current industry standards of the crypto exchange business, one that exchange late-comers have used to thrust into industry leaders, such as Binance and Huobi, as well as well as FCoin and Coinex, some of which have leveraged questionable centralized business tactics to acquire users and perk up their balance sheets.

So this article will explore the existing exchange membership programs and discuss the underlying economic models.

The Economics Behind Membership Program

Currenly, there are a number of exchanges that employ some form of membership program. Under these programs, the users first pass through the KYC process, and then can receive rewards as they trade.

The first of such program would be one used by Binance, where users who use Binance Coins to pay for trading fees can enjoy a certain amount of discount. This is also the very utility behind the Binance Coin. The Binance utility token has also been one of the most successful exchange tokens so far among its peers, with relatively low volatility and large volumes of trades. However, the Binance Coin is limited in its utility.

The next type of membership program available in current exchanges is an evolved version of the Binance’s utility token. While retaining the trading fee benefits of its originator, this version adopts a form of mining feature. Users in this type of membership program mine the exchange token by trading on the platform. With every trade users make on the exchange, a certain amount of tokens — that is equal to the trading fees of the transaction — is mined. Therefore, it could be said that trading on such platform is virtually free. Users get compensated for the volume of trades they create for the platform, and the only risk they have to take is the volatility of the exchange tokens they receive. Usually, the compensation arrives a day after the trade. The exchanges that employ such user reward program include some new exchanges including FCoin, an exchange founded by form Huobi CTO, and Coinex, a exchange founded by a close friend of Bitmain’s CEO, Wu Jihan. This second type of reward program is usually called “trans-fee mining”.

However, the incentive flow of trans-fee mining program does not end here. In the current exchanges that employ trans-fee mining, holders of exchange tokens receive dividends from the platform. The dividends come from a pool of reserve tokens that is gradually released to the community. Such distribution method enlarges the value of holding the token and encourages users to keep them, reducing selling pressure at any given time. It can be said that the utility of this type of exchange token is more diverse than its predecessor.

There is, however, a third type of user benefit program that only emerged very recently. It’s called “Ask/Bid mining”, in which mining of the exchange token takes place when users place price orders. Only the top orders will be rewarded. A snapshot of a trading pair is taken on a minute-to-minute basis. And the divident policy remains the same as in the trans-fee model.

The apparant benefit of all three types of membership program is that the cost of conducting trades is low, which accounts for a significant rise in daily volumes of the exchanges that have a trans-fee mining program. In a more extreme case, when FCoin exchange first rolled out its program, it became the №1 crypto exchange in the world in terms of volume, with a $1.4 billion daily volume, surpassing Binance, and acquired 300,000 users in just 7 days. It is for this reason that exchanges that started afterwards all employ some form of token incentive program for similar effects.

Also, one additional functionality, though actually most resembling a decentralized governance structure, of these exchange tokens is the voting functionality. It is through these tokens that votes are cast to decide whether or not the exchange community will list a new token. However, even though this seems to be the most decentralized feature of centralized exchanges, it is still a “the rich become richer” model.

Therefore, now when we look at the new membership program of ShapeShift, the economics behind it are very clear. You can find:

  1. “Volume-based rewards in FOX (ShapeShift’s own token)” and
  2. Membership levels that encourage holding of tokens, and
  3. Discount on exchange rates
Taken from ShapeShift.io blog

It is important though to point out that unlike CoinEx and FCoin, ShapeShift.io does not seem to be doing an ICO for its coin. With the current available details of its membership plans, it seems that its tokens are solely distributed to its platform members. A community-oriented distribution method is usually better than a centralized token sales that only decreases asset transparency in an already centrally controlled business. With respect to this, ShapeShift deserves more community support.

Regardless, ShapeShift is a centralized business. Anyone pretending otherwise is simply living in a fantasized decentralized utopia. With the existing regulatory progress, I would say that a membership program like this is

  1. Well-conceived given the competition from other exchange competitors, and
  2. business-friendly in a way that does not sabotage community interest.

Note: the above views do not act as financial advice nor do I have any vested interested associated with ShapeShift.io. The views are purely my own.


Who am I?

My name is Juncheng Zhang, I went to the U.S. for college for two years, in KY to be specific, to study compSci and dropped out in 2017. Now I’m fully in the blockchain and crypto space. I started a blockchain community called HN Blockchain with my partners at the end of last year, and now it’s one of the biggest blockchain communities in China. Please feel free to check out our linked in page: https://www.linkedin.com/company/hunan-blockchain-alliance/

Feel free to connect with me on Twitter: @jc_zhang_


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