Crypto Infrastructure Capabilities: Security, Reliability, Scaling
Good morning, and welcome to Protocol Fintech. This Monday: building crypto infrastructure, Fed looks at Marcus and Biden order gets results – sorry, reports.
Off the chain
Cryptocurrencies are like securities in a crucial way: prices move inexplicably and people are constantly trying to graft explanations after the fact. Ethereum’s merger took place last week without much trouble, but the price of ether did not rise, leading some to conclude that the technical transition was somehow a failure. That assumes the Ethereum blockchain exists solely to enrich holders of ether, which – hate to break it to you – is not the case. More likely, seasoned traders had already priced in the long-planned merger, and the only people buying ether on the day were the naive ones the smart set love to fleece. What did I say about crypto being just like the stock market?
– Owen Thomas (e-mail | twitter)
Build it and they will come
Despite a drop in token prices, more companies are taking the plunge into blockchain. And a number of startups are building infrastructure to accommodate them. Venture investors looking for a breakout hit—like the kind they’ve scored in traditional infrastructure over the past decade—think they have a second chance with this blockchain wave.
Custody is a big possibility. Several billion-dollar companies have already started protecting their customers’ digital assets.
- One startup taking advantage of this move is Fireblocks. Founded in 2018, Fireblocks has been known for its escrow service and wallets, particularly multiparty computation or MPC wallets, which do not rely on a single private key and require multiple people’s approval to access funds, a business-friendly feature.
- There are several other large companies that offer custody and help 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 in the midst of a legal dispute. Others like Alchemy, recently valued at $10 billion, help companies manage crypto node infrastructure.
- Fireblocks, valued at $8 billion in January, has reached $100 million in annual recurring revenue, the company said recently. Revenue grew 600% last year, and the company expects to see 300% growth this year, said Michael Shaulov, co-founder and CEO.
Security, reliability and performance are major issues that need to be addressed. Blockchains are mostly still too slow and vulnerable for business needs.
- An example of a new security need is automated auditing of smart contracts, which is usually done manually now. Smart contracts have seen major hacks, raising concerns about code gaps and operational vulnerabilities. Companies like OpenZeppelin and Tenderly monitor smart contracts and other parts of a product to notify engineers in real time of problems, while others like Chaos Labs focus on scenario planning to prepare for problems.
- New methods are emerging to perform verification and compliance to determine whether people are who they say they are through KYC and AML checks — a major area of interest for regulators, Lux Capital investor Grace Isford said, and thus an opportunity for startups.
- To scale crypto networks, new technologies such as zero knowledge proof are expected to be critical. While zero-knowledge proof is expected by many in the industry to eventually provide a strong method for scaling Ethereum, current ZK rollouts on Layer 2 blockchains are not yet compatible with the Ethereum Virtual Machine at scale at a reasonable cost. That means it’s still difficult for most applications to run on ZK digests, 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’s under the hood is much more important than what’s built on top if you’re looking for true maturity and long-term viability,” said Arrington Capital partner Keli Callaghan.
– Tomio Geron (e-mail | twitter)
A version of this story appeared on Protocol.com. Read it here.
A MESSAGE FROM VERSAPAY
With a rocky economy and high inflation, cash flow is key. Check out our exclusive report in partnership with Wakefield to find out what’s really slowing your cash flow – and what you can do about it.
Learn more
On the money
Goldman Sachs’ Marcus unit is under investigation by the Federal Reserve. Fed officials have peppered Goldman management with questions about the consumer-focused online banking division.
British regulators issued a warning about FTX. The Financial Conduct Authority published a warning to consumers about Sam Bankman-Fried’s crypto exchange, saying it is not authorized by the regulator to offer financial services or products in the country.
Shopify allows employees to choose a mix of cash and stock pay. Employees can adjust their mix of cash, restricted stock and stock options, with the ability to withdraw equity immediately.
Celsius is asking a bankruptcy court for permission to sell its stablecoin holdings. The crypto lender revealed that it has $23 million worth of stablecoins held by three of the company’s entities.
Bitcoin fell to its lowest level in three months. The cryptocurrency fell 5% early Monday to a low of $18,276 as investors dumped risky assets in anticipation of higher interest rates.
Do Kwon may receive a red notice from Interpol. South Korean prosecutors have asked Interpol for help in arresting Do Kwon, founder of the company behind the collapsed UST and luna coins, as they seek to charge him with alleged crimes, including violations of capital markets laws. Kwon denied that he is on the run.
Overheard, Biden crypto EO issue
The The Biden administration laid out details of its crypto strategy in new reports from key departments. Here are some of the most crucial points.
The Treasury Departmentwhich released three reports, cited the potential benefits of a digital dollar but also said “there may be unintended consequences of a US CBDC, including runs to US CBDC in times of stress.”
“As with all financial assets, CBDCs can be used by criminals, including terrorists, for illegal activity,” the department also said.
The department emphasized the need for it “coordinate and promote consumer education efforts on cryptoassets” to “ensure that consumer-friendly, reliable and consistent educational materials are available and inclusive, to the greatest extent possible.”
“Same-day automated clearinghouse transactions and permissioned blockchain-based payment systems are examples of the rapid pace of innovation that appears to be reshaping domestic and global transfers,” said the department.
“Darknet markets – which facilitate the exchange of cryptocurrency for criminal purposes – remain a significant focus of law enforcement efforts,” the Ministry of Justice also pointed out in a separate report.
“The scale of the challenge presented by digital assets also requires partnerships between public actors and the private sector,” the DOJ added.
“Tokenization, or the digital representation of real-world objects rather than assets issued by traditional financial institutions or entities, has potential utility in applications such as manufacturing, healthcare, the Internet of Things (IoT), and supply chain tracking.” the Department of Commerce said the report.
Coming up
The Banking Automation Summit started Sunday and continues through Tuesday in Seattle. Sessions range from how to develop for cloud technology to budgeting strategies for automation.
The US House Committee on Financial Services will host a hearing on Tuesday on alternative payment systems and national security. The hearing will feature representatives from Chainalysis, TRM Labs, the Atlantic Council, the Center for a New American Security and the Wilson Center.
The same committee will hold another hearing later in the day on diversity and inclusion at the insurance companies. Witnesses include representatives from Allstate, Evolution Advisors, the American Council of Life Insurers and the Congressional Research Service.
InsureTech Connect takes place from Tuesday to Thursday in Las Vegas. The event claims to be the world’s largest event for insuretech leaders and hosts speakers from Google, Deloitte, ServiceNow and more.
MarketWatch’s Best New Ideas in Money Festival takes place Wednesday and Thursday at Center415 in NYC. The first event of its kind features speakers such as Bridgewater’s Ray Dalio, AOL founder Steve Case and Nyca Partners’ Jasleen Kaur.
The NextGen Payments and RegTech Forum is also this Wednesday and Thursday in Athens, Greece. The event covers how to promote businesses in the midst of technological and regulatory change.
On Thursday, the US House Committee on Financial Services will hold a hearing on the impact of wildfire risk on the insurance market. Insurers must adapt to increasing risk as wildfires burn with increasing frequency, especially on the West Coast.
Don’t miss Protocol Enterprise’s event “Securing the Enterprise” on October 4 at 10.00 The online event will cover cyber security threats facing every online business and best practices for protecting companies against them. Reserve a place now.
A MESSAGE FROM VERSAPAY
With a rocky economy and high inflation, cash flow is key. Check out our exclusive report in partnership with Wakefield to find out what’s really slowing your cash flow – and what you can do about it.
Learn more
Thanks for reading – see you tomorrow!
