1/25

Kucoin was doomed long before today, but they were once a great crypto exchange.

Here is a breakdown of what they did wrong before getting hacked:

2/25

Kucoin launched late in the 2017 cycle when users were hungry to find liquidity for their ICO tokens.

Kucoin made a few interesting business decisions that no one else had replicated (at least in part until recently)

3/25

The first thing they did was offer a rewards program that paid out a revenue share - which was not novel, but at least uncommon for exchanges at the time.

What was novel is that originally Kucoin paid out that fee in each individual token instead of just KCS.

4/25

They also listed new tokens VERY early, sometimes the same day that the ICO tokens were released.

This meant that you earned trade fees in all these new projects when they were just starting out, and still had a chance to boom.

5/25

You could have a diverse basket of assets (just by getting a reward payout) and see it grow aggressively. And for 2017 this was great.

It was a unique hook - as long as you bought the premise that diversity of tokens made money.

6/25

And in 2017 we all did.

Hell, I do A LOT of referral programs and in 2017, Kucoin was the largest vendor I sent referral traffic to, and in fact to this day (despite not sending them new traffic since 2017) it is still the 2nd largest number of referrals I've sent ever.

7/25

This dynamic brought in a lot of mid sized traders who were investing, but it also brought in a ton of communities as Kucoin doubled down on being often the first and only place that small coins were listed.

8/25

This is something no one had done since Cryptsy (which was the go-to shitcoin exchange back in my day)

That really is what made them special and its why, based on their own figures, 1 in 4 crypto users have an account with Kucoin -

9/25

- there is likely some token you owned where Kucoin was the only place you could trade it.

Now as a business prof and an investor I find novel features very interesting - but not for the reason you might think.

10/25

You see, one or two novel features are not useful. They are not a competitive advantage.

It's trivial to copy many novel features and have them quickly become an industry standard, and so novel features alone are *not* how you disrupt an industry.

11/25

But, novel features point to having a team that can think of, design and implement novel features and *THAT* is a competitive advantage - in fact in my opinion it is likely the most important for a platform business.

12/25

Kucoin had that, it hit the ground running as the shiny new exchange, and then disaster struck.

The disaster Kucoin faced wasn't their hack today, it was their success three years ago.

13/25

You see, success and innovation are rivals, like the ego and the id battling for control of an organization, and you need to maintain a careful balance of them to continue your growth.

14/25

When startups hit on a successful path of growth, they tend to double-down on the features and traits that got them there.

They hire middle managers and executors to do that very same thing - but at scale.

That's what Kucoin did.

15/25

For 3 years they stopped innovating. They focused on listings, listings, listings, and optimizing for profit at scale (including switching rewards from each individual coin to being paid out in KCS to save costs).

16/25

They were so laser focused, that as the 2017 ICO "tokenize everything" narrative started to die out, they had not only typecast themselves, but, hadn't kept up with core features on other exchanges, and even worse, they had forgotten how to innovate.

17/25

They spent 2019 and 2020 scrambling to add new features to be like big brother Binance, they redid their layout, launched a new chain, launched futures, gave away cars, all the things an asian-based crypto exchange is expected to do.

18/25

And it did nothing. They continued to decline. Instead of anything new they were simply trying to compete in the same landscape as everyone else in a race to the bottom.

19/25

Part of why I'm so excited by products and platforms with novel features and ideas, isn't because I always think those ideas are good.

But, because it shows that someone there CAN think outside the box and that can easily lead to something good with the right research.

20/25

There have actually only ever been a few novel CEXs in crypto:

1. Coinbase
2. Cryptsy
3. Cryptopia
4. Kucoin
5. FTX

21/25

While most of those were a flop, the most successful one knocked it out of the park, and the newest market entrant FTX continues to grow rapidly as well.

Most other exchanges were either successful on operational efficiency, races to the bottom or

22/25

spinning up a more polished version of something that already existed.

That's not a great startup - that's luck. There is no way to bet on that, and honestly, it's boring.

VCs are looking for the innovators where even if 99 fail, the 1 success blows it out of the water.

23/25

But, as we saw with Coinbase as well, success starts to slow innovation; and I hope the same doesn't end up true for places like FTX, I hope we continue to see innovative social features, their native bot market and pushing new boundaries.

24/25

Markets don't need 25 of the same cookie cutter platform, but industries do tend to optimize towards that.

Kucoin was a critical part of crypto exchange history, it innovated in a meaningful way and in turn built part of this industry.

25/25

Their downfall wasn't a hack, it was their own success that led them to be just another boring old exchange.

That's why underdogs, novel ideas and 'bad projects' that experiment on something new are so exciting.

Lacking just enough success to stay hungry matters.