The True Cost of Crypto Exchange Listings
In the noise that followed the BSV delisting debacle, Blockstream Co-founder Adam Back (@adam3us) suggested an ‘unpopular opinion’ – that listing coins should be on technical factors only. This was an interesting statement as it ignored a number of real-world factors like legal and regulatory pressures on the crypto exchange, as well as the costs associated with listing a new token.
Exchanges are centralised companies looking for profit, operating within jurisdictions they have obligations to, and many other factors that affect what they can and can’t, will and won’t list – including their balance sheet. That’s before we even get into the individual exchanges’ political and tactical strategies.
It is likely not too much trouble for top-tier exchanges to add new token – Coinbase recently declared profits of $350 million for the year. Stories like this give the general impression of crypto exchanges as cashcows – particularly as most news is centred on large players such as Bitstamp, Kraken and Binance. But below these sit a raft of smaller crypto exchanges, without seven-figure sums to throw at operations and marketing but with the same legal and consumer pressures. I spoke to Jamie McNaught, CEO of UK exchange Solidi, about the challenges of running a more modest exchange.
‘I think in the mind of customers, exchange=money printing machine. It is just not. The direct sales costs are fairly minimal, but indirect costs can be staggeringly high for small exchanges.’
McNaught recently made the decision to add additional tokens, Litecoin and Bitcoin Cash to Solidi, previously a Bitcoin-only service. This was partly a response to consumer demands, with 70% polled in favour of the move. Solidi is now exploring adding Ethereum, Ripple and Bitcoin SV. Whilst adding a new token is technically relatively easy, it’s ensuring the new software runs seamlessly that takes time and effort. McNaught explained,
‘It’s not just a case of add the new token’s software and cross your fingers. This is how a number of sites have got hacked / lost lots of coins. In the case of Solidi, we have thousands of unit tests which test every aspect of how Solidi works – we can’t add a new token without having to update a lot of tests.
We also have to be sure that the third party software used to run the client (such as the bitcoind software, or the Ethereum geth client) is secure and doesn’t contain malware. The client needs to be isolated form the other clients. We need to update our Cold Storage solution to work with the new token, etc etc.So adding a new token properly is time-consuming and expensive.’
Forked Coins are a ‘pitfall’
Forked coins brings additional pressure for exchanges, since customers have the ‘right’ to their forked coins but the exchange still has to go through the process of adding them.
‘Forks are such a pitfall, there are massive costs often to list a fork and these come in many guises. Technical resources/developer brain space, security – forked coin clients need to be completely isolated from our network in case the forked coin is bad – server costs (will the fork income cover these?) and opportunity cost, to name just a few.’
If you have worked in the blockchain space for longer than 5 minutes you will know that good blockchain developers are difficult to find and don’t come cheap! Adding new coins is largely a question of human resourcing. According to McNaught, allocating valuable dev time away from other high-priority tasks is a difficult call to make, particularly where the token is little-known.
‘If you are adding a risky coin, one that is not well known, one that might have a closed source client or just a client where the code is badly written, can often create more support headaches than it ever creates in fees once you factor in engineering time at £5k / day, and a large ‘insurance premium’ too.’
Of course if you are a big crypto exchange you can charge a premium for new listings – in my experience as much as $1 million per token. An article from Forbes also cites this figure, and notes the average listing cost to exchanges as $50,000 per year. Most exchanges should make this back in fees but either way the ‘free world’ that Back speaks of is not entirely ‘free’. It makes a good debate, though.