Fintech

Investors are looking for the next big crypto software provider

A few crypto software companies are already worth billions, but investors are betting there are many more in the pipeline.

Road to crypto

The demand for crypto infrastructure products has spiked.

Illustration: Christopher T. Fong/Protocol

With more companies and large financial institutions jumping into crypto, the demand for crypto infrastructure products has spiked.

Despite a drop in token prices, many companies have come to the realization that crypto is not going away and are taking the plunge into blockchain. The crypto infrastructure being built to accommodate them is also making it safer and more welcoming. Venture investors, meanwhile, say they’re looking for the next breakout, like Palo Alto Networks, New Relic or PagerDuty, but with a crypto twist — most traditional enterprise companies aren’t equipped to address the complexities of blockchain technologies.

“The development of core infrastructure is still the gating factor for mass adoption of blockchain technology,” said Keli Callaghan, partner and head of growth at Arrington Capital. “At the heart of any crypto ecosystem that wants to be truly mainstream is a dependable, scalable and secure technical foundation.”

One startup benefiting from this move is Fireblocks. Founded in 2018, Fireblocks has been known for its custody service and its wallets, particularly multiparty computation or MPC wallets, which don’t rely on a single private key and require multiple people’s approval to access funds, an enterprise-friendly feature.

There are several other large companies providing custody and helping manage crypto assets for large institutions, including Anchorage, which was recently valued at $3 billion, and BitGo, which recently had its deal to be acquired by Galaxy Digital fall apart amid a legal dispute. Others such as Alchemy, recently valued at $10 billion, help companies manage crypto node infrastructure.

Under custody

Fireblocks, valued at $8 billion in January, has reached $100 million in annual recurring revenue, the company recently said. Revenue grew 600% last year and the company expects to see 300% growth this year, said Michael Shaulov, its co-founder and CEO.

About half of Fireblocks’ business involves enabling crypto trading, treasury management and exchange integration. The other half comes from fintech companies using its wallets to store customer assets. Fireblocks has also added DeFi features like staking and has more than 400 of its 1,500 clients using it for DeFi purposes.

The growing utility and power of crypto-related software is driving more interest from financial institutions.

Startup Prime Trust has seen a “significant uptick in interest and inquiries from banks, wealth managers and other financial institutions” in crypto, said Chief Product Officer Sara Xi. These firms are trying to determine what their first crypto product might be and how to comply with KYC/AML regulations, safeguard assets and educate consumers on risk, she said.

Fireblocks expects to have about 70 banking clients this quarter, up from about 25 last quarter. Many of them are “leapfrogging” the simple holding of crypto into more complex uses such as tokenization of assets and the creation of stablecoins, Shaulov said. For example, Fireblocks worked with Australia and New Zealand Banking Group to mint a stablecoin pegged to the Australian dollar.

A number of newer companies are working on semi-custodial solutions that sit somewhere between a consumer wallet like MetaMask and high-end institutional offerings, said Anand Iyer, founder at investment firm Canonical Crypto. “It's somewhere between having a safe in your house and trusting a bank,” he said. Such offerings could enable more mainstream usage, he believes.

Securing opportunity

Custody is just one hot growth area in crypto infrastructure. Security, reliability and scaling are other problems companies are trying to solve, said Grace Isford, crypto investor at Lux Capital.

One example of a novel security need is automated auditing of smart contracts, which is typically done manually now. Smart contracts have seen large-scale hacks, prompting concern over holes in code and operational vulnerabilities. Companies like OpenZeppelin and Tenderly monitor smart contracts and other parts of a product to let engineers know in real time about problems, while others such as Chaos Labs focus on scenario planning to prepare for problems. Some of these technologies also notify programmers that their code could have a vulnerability while it’s being written.

New methods are emerging of doing verification and compliance to determine if people are who they say they are through KYC and AML checks — a keen area of interest for regulators, Isford said, and hence an opportunity for startups.

Another area ripe for change is data infrastructure, where there are already large players such as The Graph and Chainlink, so-called data oracles that provide real-time data for crypto applications. These applications mainly provide data on stocks or tokens but aren’t designed as well for other types of data, Iyer said. He added that the technology is necessary to develop crypto applications that connect to the real world.

Finally, to scale crypto networks, new technologies such as zero knowledge proofs are expected to be critical. While zero knowledge proofs are expected by many in the industry to eventually provide a strong method for scaling Ethereum, current ZK rollups on Layer 2 blockchains are not yet compatible with the Ethereum Virtual Machine at scale at a reasonable cost. That means it’s still hard for most applications to run on ZK rollups, Isford said.

While consumer apps and NFTs tend to get the most press and consumer interest, infrastructure is what will make the industry thrive, investors say. “What is under the hood is way more important than what’s built on top if you are looking for real maturity and long-term viability,” Callaghan said.

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