Into the Crypto-Rabbit Hole!
What in the World is Going on with Crypto Native Startups! (Guest Article)
Introducing Inquisitorial by Indianaut, a long-form newsletter where we explain and analyze important stories stemming out of the Indian entrepreneurial ecosystem & economy. New articles every Saturday & Sunday.
Today’s post is a guest article for Inquisitorial, written by Shikha Mohanty in collaboration with Abishek H. Shikha is an Investment Associate at Leo Capital, a venture capital fund, investing in early-stage, technology-centric opportunities, primarily in India, SEA, and the US. Her writings’ are available here.
(Image Credits: FT)
Cryptocurrencies have made the headlines multiple times over the past few years (Remember the frenzy each time when cryptocoins touched skyrocket prices as well as when their prices dropped? ). But if you take a deeper look beyond cryptocurrencies, there is a host of innovative companies that are employing similar technology fundamental to that of cryptocurrency projects- i.e, Blockchain.
Blockchain Explained… through the prism of Cryptocurrencies
The primary reason cryptocurrencies were invested in was to promote decentralization i.e. to remove dependency from centralized authorities like Central banks, commercial banks, or centralized servers or governments. Cryptocurrency works on blockchain technology and hence to understand cryptocurrency, we need to first understand the blockchain technology. Blockchains may first sound nebulous, but in simple terms, they are a type of distributed database that is stored on multiple computers or nodes (e.g. those run by me and you) which enables decentralization. Additionally, blockchain is a technology to store records of information to make it tamper-proof. Let’s understand this with a simple analogy – ERP systems record tons and tons of data with timestamps and usually follow a make-check-authorize concept wherein a person enters the data, another person verifies and approves the data. Blockchain works on a similar concept in which the ‘Block’ contains the data of the transaction, which is then verified and approved by the ‘Miners’, after which the block gets attached to the chain and hence the term ‘Blockchain’. This forms an ‘Immutable chain’ of data.
A Block contains 3 pieces of information: ‘Hash’ of the block, ‘Hash’ of the preceding block, and data. Hash is a unique alpha-numeric combination of 64 characters which acts as an encryption key which becomes the identity of the block like Aadhar Number. In the case of Cryptocurrency, the data contained in the block include the address of the sender, the address of the recipient, and the amount. A copy of this chain is given to all participants (‘Nodes’) leading to a Distributed ledger. This ledger provides Real-Time copy.
To add blocks to a blockchain, there needs to be a consensus algorithm that all nodes need to agree on to accept a new block into the blockchain- Proof-of-Work and Proof-of-Stake are two types of consensus algos, where bitcoin uses POW and Ethereum is planning to move from POW to POS.
Crypto-Native startups and Investment Landscape
While, initially, the term crypto might have alluded only to currencies, however, the word has come to refer to players in the wider blockchain ecosystem that enable and power the crypto industry. Also, cryptocurrencies have gained significant traction amongst retail investors over the past few months, there have also been a variety of enablers and crypto native startups cropping up in the larger blockchain ecosystem. Heaps of capital have been pumped into these startups and numerous crypto-native companies have reached unicorn status.
Below are some broad startup categories that have seen lots of activity lately from a Global and Indian context:
Enterprise Blockchain Tools and Infrastructure focused
Startups under this category are mainly creating solutions (or tools) for developers to help them build, prototype, test and deploy applications securely and privately on the blockchain network or provides infrastructure solutions.
Why is this important? As more and more companies come on board the blockchain network, it’s important to provide the right tools to developers to ensure this transition happens smoothly.
For instance, Aleo offers tools for developers to create privacy-preserving applications for new use cases. Another US-based company, Digital Assets, helps enterprises by providing each stakeholder (in the form of an open-source smart contract language) a consistent view of the global system, i.e. Company A and B cannot argue over who owns/owes how much, which in the non-blockchain world is handled by a centralized authority).
There have been some Indian companies that have also emerged in this space. For instance, SoluLab is an Ahmedabad-based company that builds enterprise-class Blockchain apps for a variety of sectors.
Enterprise tools have been a hot destination for VCs to invest in because of their popularity amongst developers and organizations. Institutional investors are bullish about this sector because it solves the issue of lack of infrastructure and scalability. Also, this is an attractive sector because as more organizations try to get on the blockchain network, they will need help to ensure that the transition is smooth; this translates to a budget specifically allocated by the company for this. It would not be too far-fetched to claim that this phenomenon can be expected in the blockchain equivalents with high valuations and big check sizes.
Exchanges
Earlier, one could only hold cryptocurrencies by mining them or buying them off someone who is willing to sell them. This method is technically and financially challenging and people started looking for a simpler and cost-effective way. This is the genesis of how crypto exchanges came to being. Globally, most exchanges have had a remarkable year as trading volumes increased significantly. Primarily, there are two types of exchanges: Centralised and Decentralised. Coinbase, a centralized exchange and a poster boy of crypto-native startups, caught eyeballs recently as it debuted on the public market and has been described as a “watershed moment for the crypto industry”. Closer to home, even though interest amongst Indian masses in crypto has grown multifold in the last year, historically speaking, wealthy individuals have been more open to participating in the crypto market. For this reason, Indian exchanges, such as WazirX and CoinDCX, have been quick to innovate by personalizing services for their HNI users. Why you may ask, exchange specifically focusing on the HNI segment? Well, to put this into perspective, HNIs in India trade over USD 25 million on exchanges per month or buy crypto over USD 100,000
Interestingly, there are a set of companies, such as the algorithmic crypto trading platforms, that allow retailers to invest in strategies built by experts. Eventually, this could help in reducing the barrier of entry for retail investors.
However, an increase in the number of hacks and crashes is posing a real challenge for several centralized exchanges, which has led some users to look at alternatives in the form of decentralized exchanges. This would certainly be the next focus for many institutional investors.
Ultimately, the winning attributes of a successful crypto exchange would include convenient customer onboarding, top-notch service/ customer support as well as a great UI/UX that instills trust in users. Another interesting attribute of a successful player would be educating investors about the crypto space, which can also be seen as an acquisition hook.
Cryptocoins
Cryptocurrencies have, up until recently, had a great year and have attracted interest from top-tier companies including BlackRock, Mastercard Inc, and Visa. While some currencies have hogged the limelight for the better part of the year, the real value of currencies comes from the utility of the projects they represent. For instance, arweave.org is a project that helps to store data permanently and has an interesting way of acquiring customers by mandating new customers to tweet about them (talk about innovative GTM strategies :D) before they can get a token.
Also, there is some Indian crypto that are making waves. Matic is one of them and is essentially trying to solve the scalability issue of Ethereum.
During the crypto bull run, more than 53 blockchain projects emerged as multibillion-dollar crypto unicorns. As major influencers bring attention to this sector, institutional investors are looking beyond BTC as there are several projects working on interesting and emerging use cases such as smart contract platforms and Defi protocols.
NFT
A relatively newer member of the crypto universe to make global headlines are Non-Fungible Tokens (NFTs). At a high level, NFTs are immutable and irreplaceable digital collectibles such as virtual accessories used in gaming or digital artwork. Broad categories under which NFT native companies typically fall are marketplaces, tools to create virtual collectibles and enablement of real-world commerce. This year after NFTs have been sold for millions, creators and collectors have been drawn to marketplaces that list such collectibles. On the back of this momentum, India’s WazirX launched the country’s first NFT marketplace.
One of the major drivers that enabled the rise of NFTs is the increasing number of creators out there who struggle to monetize their work (could be anything ranging from art to videos). So, as the creator economy continues to grow in size, NFTs are expected to be pushed further into the mainstream in various regions including India.
Custody Solution
Even though one gets a wallet on opening an account with crypto exchanges, individuals don’t have control over the public and private keys. This simply means that in the event an exchange shuts down or gets hacked, one might lose their coins. With rising cryptocurrency interest, wallets would also be in high demand. This explains why Ledger SAS (hardware wallet for bitcoins) raised the second-biggest funding size ($ 380M) so far this year on the back of increasing investments into cryptocurrencies by institutions as well as individuals. On the institutional custody side, companies like Gemini provide services. While the jury isn’t out on the type of wallets preferred by Indian crypto investors, the winners in this space would likely be those with great user experience, speedy transactions, and the ability to hold multiple currencies while providing the necessary secure environment.
Conclusion
Despite the meteoric rise of crypto native startups globally, their Indian counterparts have made comparatively slower progress primarily due to a lack of legal framework. Additionally like with any new technology, the utility of a technology to a company can be restricted by the lack of tech talent. But in recent years, several global crypto companies are acknowledging the tech prowess of Indian developers and are setting up their development centers here. This is a significant trend because many developers haven’t necessarily been formally trained in blockchain technologies but the cost arbitrage justifies the training cost that the company needs to incur. On the other hand, it also benefits the larger Indian crypto ecosystem as it expedites innovation and prepares Indian crypto startups to serve the global audience.
As Indian crypto companies tackle one legal battle after the other, accompanied by the growing interest of the masses in the asset class and VCs piling capital into crypto companies, the Indian crypto scene is bound to see an explosion of activity.