Large Crypto exchanges are serving to complement, and not just compete with smaller crypto exchanges in ways that have proven mutually beneficial.

That’s the surprising overall takeaway from new joint research out of The University of Chicago, and Fudan University School of Economics.

The study, posted in the 28 July Cryptocurrency Research eJournal and available via the SSRN research website, detailed ways that crypto exchanges appear to defy normal competitive market expectations.

The authors provided several examples:

“Suppose a large exchange lists a new token. If exchanges were competing over a fixed customer base, trade volumes of the token on smaller exchanges should decrease, and small exchanges who have not already listed the token should be less likely to list, due to the entry of a large competitor. We find exactly the opposite patterns empirically. When a large exchange lists a new token, trade volumes of the token on smaller exchanges increase, and small exchanges become more likely to list the token. In other words, large and small exchanges appear to behave like economic complements, rather than economic substitutes.”

Researchers studied data from 500 crypto exchanges, over an extended period, from 2017 to 2022.

Part of the reason why smaller exchanges are able to capitalize is due to a muddy regulatory picture in the sector.

Many crypto users prefer using smaller exchanges because of the regulatory strictures different states and regions have imposed, including legal attacks on leading exchanges like Kraken, Coinbase and Binance.

The paper terms users of smaller exchanges as “captive users,” who might opt for more (crypto) mainstream platforms, if regulations were clearer and friendlier.

Or they might not. Many crypto users are tech savvy and wary of centralized large powers, and that includes large centralized exchanges. Researchers also suggest the possibility that some users are drawn to smaller exchanges because they are not so savvy, and are unaware of the relative ease and features of larger exchanges available to them, though this seems less likely.

In any case, though even the largest exchanges operating in the U.S. each comprise less than 20 percent of overall trading volume, they still manage to “lead” the market in terms of crypto token activity.

As the study authors detail, tokens they decide to list usually see greater subsequent interest and activity on smaller exchanges, which also often offer access to more obscure crypto tokens and projects.

The so-called captive audiences pay a premium, compared with larger exchanges, for the freedoms and choices they gain via smaller exchanges.

But the overall result is that larger exchanges aren’t squeezing out smaller players, even when it comes to the more mainstream token choices they list.

What does it all mean for crypto investors? 

One conclusion might be that tokens listed on larger exchanges don’t mean that investors on small exchanges looking for “to the moon” obscure token opportunities, write off the coin as too mainstream.

Another conclusion is that if clearer regulations that admit and allow innovations of crypto technology to advance, with some sincere efforts to protect consumers, smaller exchanges may ironically have a tougher time remaining relevant, as more traditional market mechanisms come into play.