On The Brink with Castle Island - Katie Chase on the maturation of cryptoasset data (EP.212)

Episode Date: May 10, 2021

Katie Chase, the Chief Operating Officer of Coin Metrics joins the show. In this episode we discuss: Katie's time leading blockchain initiatives at Fidelity and how the firm approached early R&D efforts Her point of view on the historical barriers to institutional adoption of cryptoassets and how that is changing How Coin Metrics is addressing the data needs of large financial institutions Why risk management is an overlooked area and how CM's Farum product addresses the needs of exchanges and brokerages To learn more about Coin Metrics visit coinmetrics.io Sponsor notes: Copper is transforming how institutional investors engage with digital assets by developing award-winning custody and next-gen trading infrastructure. Headquartered in London, the firm is scaling rapidly across Asia and North America to bring its suite of products to a wider pool of institutional investors. To learn more visit copper.co or reach out on Twitter, @CopperHQ Aave is a decentralized, open source, and non-custodial protocol where users can deposits and borrow digital assets, and earn interest on those assets. Head over to aave.com to experience and learn more about DeFi.

Hi everyone. Today's episode is brought to you by Copper. Copper is the global provider of blockchain infrastructure solutions for institutional investors who are actively trading their digital assets. They have an award-winning custody application that's connected to 25 of the world's largest exchanges, and they ensure safe storage and movement of assets for some of the world's largest crypto hedge funds, market makers, family offices, and high net worth individuals. Copper's clear loop is the first off-exchange settlement network for digital assets. And it's the safest way to try to, trade balances in custody across multiple exchanges without requiring on-chain movement of assets. Head over to copper.com forward slash clear loop to learn more.

That's copper.com forward slash clear loop. And today's show is also brought to you by AVE. AVE is a decentralized open source and non-custodial protocol where users can deposit and borrow digital assets. You can earn interest in those assets. And head over to AVE.com, that's A-A-V-E-D-com, to experience and learn more about Defi. Today I had the pleasure to sit down with Katie Chase, the chief operating officer of Coin Metrics, a crypto asset data company that recently raised a $15 million series B, led by Goldman

Sacks, and it's a company that we're also investors in. This was a very special episode for me because Katie's one of the biggest reasons why I met Castle Island Ventures today. Katie was part of the team that originally hired me at Fidelity, and I later directly worked for her in the corporate strategy group when we're exploring blockchain technology back in 2014. And needless to say, she was an awesome boss. She was definitely someone who's very influential in my thinking about this industry and more broadly just about my career. So this conversation was a ton of fun for me, given that background. And we touched on some early fidelity stories. We talked about Katie's views on the current state of play in the institutional market. And more specifically, we talked about

some of the new products that coin metrics is rolling out that I'm really excited about. I think you'll enjoy this one. So without further ado, here's my conversation with Katie Chase. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of concentrated easing. You print a couple trillion dollars, and all of a sudden, people start to worry.

So out of this worry, we have something called a Bitcoin. Bitcoin. Katie, so thanks so much for joining us on the podcast today. I was trying to think when I was getting ready for this podcast when I first met you. And I concluded that it was during a cell launch at Fidelity Business Consulting. And that was in 2013. So who would have thought that crypto would lead us this far that we're talking under these circumstances today? Yeah, absolutely crazy.

I was trying to think about it too because I, I think 2013 was right around when I had first heard of Bitcoin. Exactly, yeah. So your cell lunch at Fidelity and sort of Fidelity's initial exploration into Bitcoin are very coincident. Well, I remember when I first got to Fidelity, I started talking to people about who's thinking about blockchain here? And has anyone actually taken this seriously? Did people like Bitcoin? Has anyone in the business units thought about it?

And someone in consulting group said that KD had thought about decentralized exchanges and had written the white paper. So I'm curious as a jumping off point, how did you hear about Bitcoin and what actually made you excited about it to the point where you wanted to work on it professionally? It was actually a consulting project for me initially. There's a senior leader at Fidelity who was really interested in understanding more about it. And again, this was early, like 2013. This guy was ahead of his time. And I hadn't heard of it up until that point. And we got a team of like three or four people just to kind of dive into what was available around Bitcoin back then, which wasn't actually that much.

If you think of all the educational resources available to us now, it was pretty skinny. And you're kind of like digging through message boards and trying to sign up for these random newsletters. There wasn't that much. And we had all these weird theories. We were going to see Airbnb was going to use Bitcoin and people were going to get into their units without ever having any contact with owners. we thought it was going to really democratize access to financial services and parts of the world where there isn't sort of uniform access. And it just was so mind boggling when you could think about the repercussions of what something

like Bitcoin could bring to the world that I think all of us on that little mini project just kept wanting to get involved. What was the reception from the business units when you first started talking about it when you first did that project? Even early on, some of them were curious. I know there's a senior gentleman over in Fidelity Institutional, and he consumed my entire one-on-one, asking me about this particular piece of work that we had done because one of his colleagues had told him we had worked on it.

So some of them were definitely curious, but I would say pretty skeptical, pretty uncertain that it was really ever going to be a thing. And so that consulting project served as the jumping off point for a later, much bigger project called scenario planning, where you led an initiative called frictionless capital markets. And I luckily got to work on that with you. And the way I remember it is that we were initially looking at Bitcoin from a post-trade settlement lens. That was a big theme. And colored coins were a big thing at the time. And we were thinking that maybe this technology could serve as the infrastructure to actually settle trades. And I guess that was a little bit naive. But what's really

surprising to me as I look back on it is just the senior leadership team giving us the bandwidth and the rope to just explore on an open-ended basis for a long time. And their time. If you remember that effort, so I think it's pretty phenomenal that it from like Fidelity is like thinking 10 years in the future in engaging in these kind of long-term thinking or scenario planning activities. But we were with a pretty senior group of leaders multiple times a week proposing articles for them to read, bringing in guest speakers, thinking about how this technology

could impact our customers, could impact our employees, could impact the business. and they were really engaged and proposing alternative scenarios and trying to get involved in potential actions we could take to learn more, potential responses we could take to react to kind of customer demand. If you just think about at the time, I think I was at 2014, it was early. Just the willingness to put in the energy to learn about something that was not widely accepted in 2014. Totally.

And it wasn't the type of thing where you put your head down for two or three months. You come up with a business plan and then there's something to work on. this was like a two-year-plus exploration with there were some experiments, there was some Bitcoin mine, there was Bitcoin in the cafeteria, there was some payment wallets. But there wasn't really a big product. There certainly wasn't a business unit. And throughout that, the price of- But I mean, how fun was that? It was the best. I mean, I remember just thinking when the price of Bitcoin cratered and we're going through this private blockchain, blockchain, not Bitcoin cycle, I was just thinking any day this thing is going to get shut down. I can't believe that we're

still doing this. I mean, obviously, I still believe in it, but they've got to be close to pull on the plug here. Well, but we're asking the head of technology to go buy something in a cafeteria with Bitcoin. He's stuck in line because the cashier doesn't know how to check him out. The whole thing was just hysterical and hearing about people's experiences and having the leadership team experience at firsthand and just learning altogether. Like everybody learning, it really was a journey where nobody was an expert really at the time. I thought it was a blast. look back on that very fondly. I think even some of those early experiments were we're transferring at the time, 10 bucks. Some of that I've held on to. And it's actually worth something now.

Yeah, it's crazy to think back on it. When you think about this, now you're talking in your capacity of coin metrics to a lot of different banks and broker dealers that are getting in the space. And how do you perceive kind of the innovation that happened on the inside of Fidelity versus the innovation that's happening right now with banks and broker dealers? Where are they with their journey. And I know that's a broad question. Fidelity has a lot of benefits. It's a private company. So I think they obviously got into this far earlier than a lot of other organizations. And there's just an extreme amount of patience around innovation. But I wouldn't say that the other institutions we spoke to aren't following a too dissimilar of a journey where a lot of the early efforts,

even when I first joined coin metrics, were about educating the teams that we're speaking with at these companies about the space itself. So we're spending a lot of time putting our network data experts on the phone with folks, putting our market data team on the phone with folks, explaining the depth of the market, the liquidity in the market, the on-chain dynamics in the hope that it might lead to a conversation we're talking about purchasing something at some point, but kind of knowing that there was going to be a really long sort of cycle to this, that they were going to have to get their arms around it. They're going to have to explain it to other people at the organization before they're going to engage in like a purchasing discussion because their organizations just quite frankly weren't ready

to do anything in the space. And they needed to understand what the space was to understand if there's anything to do. And we were part of that education for them. Totally. The thing I said to someone earlier this week was you have to remember back in 2014-15, we didn't even really know what the thesis around why Bitcoin was, we didn't even really understand why someone would want to hold this at an institutional level. People were coming at this much more from is this a payment system? Is this like a visa disruptor? Much more around the rail. Yeah. We even had that whole like envelope analogy where it was the envelope and the Bitcoin was a stamp and you put things in the envelope. Right. Exactly. I remember that. And so now at least I think there's a realization that, hey,

it's digital gold or I have an investment thesis around inflation. And so something like Bitcoin matters. And so you can maybe understand that first. Whereas the other approach is to just really build up from a base primitive on the technology. One of the things, that was interesting throughout the years at Fidelity was just seeing the infrastructure components of the market mature. What did we and you see early on in this market? You can talk a little bit about the journey around just even discovering that custody was an opportunity. I can actually like envision the page, but I think we thought about two layers of infrastructure, the blockchain technology itself and what needed to happen there in terms

of maturing around layer two technologies and scaling, around interoperability amongst across chains, around the mining ecosystem. But then there was this other layer, which was really more of the market infrastructure, and that's where custody came in as like a really foundational piece, kind of a must have for larger organizations to participate. And obviously, there were other trading and execution services, obviously data was one of those foundational pieces that we saw early on as being absolutely critical. So we always envisioned having to build out these layers and sort of seeing those layers mature before you're going to start to see a lot of investment product and application development on top of that. It actually has all gone probably

much faster than I had expected. So the amount of maturity that you've seen in terms of custody as just maybe the first example, but trading and execution services and even the user interface has gotten so much better than weren't with that when we first started thinking about this. It's interesting because the mining project and experiment in some ways kind of informed the need for custody. I don't know if that was expected on the way in, but exposed maybe some of the complexities there. I guess you never know what you're going to learn. The scan, try, scale kind of mantra of the innovation teams over there really, I think when you get to the tri-part, you really do learn things that you're not expecting to learn. And you learn

sometimes things that are going to work. And then you learn a lot of things that aren't going to work. And obviously, mining and then storing paper keys under your desk is not going to work. So you do learn a lot through those types of activity. Pretty obvious that the armory wallet was not going to scale towards institutional grade custody, although it was pretty good. So kind of dovetailing into coin metrics. Talk a little bit about what attracted you to this opportunity to join coin metrics. lead the firm as the chief operating officer? I was a user of coin metrics data, both as a client, but also as a community user. And I really loved what coin metrics was trying to do in terms of bringing transparency around this whole space. So for those of your listeners that aren't familiar

with coin metrics, we started as an open source effort, actually Nick Carter. I need to put a disclaimer out there, an investor and founder and partner at Aswell and Ventures, started this company with another gentleman Alexi, and all of the original node infrastructure was open sourced. A lot of our data is available to community for free. And I really thought that was very consistent with the ethos of crypto. I also thought it was the best data product out there. I made it through a lot of vetting on the Daldi's part. I felt really comfortable that there was a really, really solid foundation in terms of both market data and on-chain network data and knew that we could build on that. If you think about that as being our first foray

into intelligence and crypto intelligence financial products, there's just so much that you can build on when you have that excellent foundational layer. That makes sense. When you think about the business today, it's come a long way just in the past year, especially from a product perspective. How do you describe the business and the types of products that you're offering today? I mean, now I think we're a holistic crypto intelligence provider. So we have a very good breadth of product. We started with that on-chain data product. We've only expanded into more assets, more metrics in that space.

That really gives you a good view of what I view is the fundamentals of crypto, things around usage, understanding what's going on with the users and the transactions and the miners in the space. We paired that with an amazing market data product, which has data from 28, bought exchanges 11, derivatives exchanges, and it has at the most kind of granular level of detail that you could get. And what we're able to do is sort of built from there. So we now have some really interesting index products.

Obviously, we have the single acid indexes, but we also have index products that combine the network data and the market data. Because with the on-chain fundamental data, you can get these very interesting measures of supply. And you pair that with a price, and you can see how now you would weight a multi-acid index. And we've now kind of even built a bit further and started to create other aggregated metrics on top of that. We've taken that network data product to the next level. We're now we're able to really look at the activity on chain to understand the inherent risk at any given moment in any of these cryptoassum network.

So that's now yet another new product for us. So you just kind of see how all of these are very complementary. And once you build that base infrastructure, you really do have a fabulous holistic solution for organizations that are entering the space. That's a great overview. I remember when we first started looking at market data at Fidelity, there was a big question around how you would even, if you were offering custody, how you would mark customer P&L at the end of a quarter or at the end of a day. What's the reference rate on this? What exchange are you going to look at? So it makes a lot of sense to me that that's a great point.

place for institutions to start is to just figure out what is the actual price of this, which seems so easy. It's just like running a playbook that exists in other asset classes. And I mean, sometimes it takes people a bit of time to get their arms around that because there isn't a single price. There are more than dozens, but dozens of exchanges that we look at. Every single one of them has a different price right now. So it's really exciting to be the market data and the network data. And certainly as more banks and broker dealers get into this space, that part of the business is growing really quickly. Talk a little bit about the risk side of the business. So specifically around the new products that you've launched with partnership with KPMG, how you're going about the risk

management portion of the business. It's been a fascinating kind of research and development exercise in that product build. We have, it's called Barham, our network risk management offering. And we have developed a tool that can help businesses do anything from informing asset selection all the way to kind of optimizing the operations. improving their clients for managing just their network risk, by informing them, making it completely transparent when there could be a 51% attack occurring. If perhaps there is an orphaned block,

or maybe your transaction is in an orphaned block, if there is any kind of an inflation bug. These are all things that you can detect with this on-chain data. It's just for some reason never been a huge focus of folks to try and detect it. So the way that manifests itself is in these. key risk indicators. So we have over 50 key risk indicators for each of these networks. And those key risk indicators are interesting in of themselves. Some organizations that are very deep in crypto will just want to look at each of those individually. But it aggregates into a score that

gives you a sense for the overall health of that network. So at any point in time, you could have, I'm just going to use a very simple kind of red, yellow, green. Your network could be green. Probably most of your networks are usually green. You can feel very comfortable transacting on that network. in that state. But occasionally it might be red, and you really should think twice about whether or not it's time to hit that big red stop button or investigate why it's red. It could be as simple as you're very conservative. So you set your red threshold to a very sensitive place. And maybe you just need to increase your fee levels and that will kind of move your transaction through to settlement. But you could actually have high value transactions that are at risk of not settling for much more

serious reasons. So we think it's going to be huge. We think that quite frankly, this is just sort of an overlooked part of the ecosystem right now. We think what we're building is going to really help the projects. We think it's going to really help the users. We think it's going to be really informative to the institutions in the space. I think it's going to be huge too. And when I first saw the product and maybe even the early sketches of the product, I had a similar feeling to the first time I saw the analysis tool and their suite of products where it's just like, oh my God, I didn't realize this was possible, but it makes a ton of sense and you'd have to use this. I didn't realize I should be looking at that. It's almost like my fiduciary response.

now that I know. Exactly. So I don't know what the analogy is, but for brokerages and exchanges and really anyone who's touching customer assets, it's almost like a cloud flare level of service where how can you engage with a public blockchain without some sort of a risk metric? And why are you having an arbitrary? The thing that really spoke to me was just around settlement windows and settlement finality. So picking an arbitrary block account to establish settlement finality actually makes no sense. If you can actually have a quantitative way to calculate it. And just like the very simplest thing, like being able to just track your transaction from the time it's initiated through whatever you're comfortable in terms of like settlement, I won't even call it finality, but whatever you can get comfortable with in terms of the ultimate settlement, it's not easier straightforward today. This tool also enables that.

So it lets you see that transaction in the menpole. It lets you see that as it's getting mined. It lets you see that then making its way into a block and then into the second, third, fourth, went down the chain. So I think just that anxiety that both the operations team feels and the initiator's transaction into the client that's sending them a very large deposit feels to just have visibility into that the whole way, I think it's going to be very comforting. Yeah. I'm sure the auditors and the accountants will like it as well. Yeah. Obviously, we are working with KPMG on that. They are obviously all about managing and mitigating risk. That's a big part of their role.

as an audit firm, and so it stands a reason that this would be an interesting kind of code development effort. I think from an audit perspective, there's tons of interesting stuff that they're learning to avail themselves in the space. So as part of our effort to build Farum, our risk management tool, and even just as part of our internal efforts to make our metric calculation more scalable for on-chain data, we built this interesting data model, which is now manifested itself into a blockchain explorer. And that's also this crazy powerful product that is just very performant. It allows you to look at the full transaction history across any blockchain that you may be

interested in if you're an auditor. That's very powerful for you. You can match that reference rate with that on-chain transaction activity, you know, bang. Your audit. The other kind of interesting thing about that is to the extent that other types of assets are appended to blockchains, whether that be NFTs or real-world assets, that type of a tool almost becomes a, do you think of that as a search? engine? I mean, that's how I think of it. Is it a search engine for things that exist on

blockchains? I mean, we're calling it Atlas search, actually. And even right now it's an API, but the front end interface that we've designed and that are envisioning, it looks a lot like a search engine. And you can envision how you can start to filter things in there, not just by, I want to only see the things in the state range, or I only want to see things I put in an address that may be appropriate across multiple derivatives of kind of Bitcoin chains. I only want to see this asset or I only want to see transactions of the size or addresses in this range of sort of native asset unit. So you can just think about how powerful that can be. And if you can get to the point where you can start to search for keywords that people may have included in there, like I can't

remember what block that chancellor word was in. I mean, there's all sorts of stuff on their wedding proposals. And it's like college degrees. People are putting all kinds of stuff up there. That's fascinating. So there's obviously a range of maturity in your customer base. You have some customers that are publicly disclosing that they're working with you on Bitcoin ETF filings. Fidelity would be one of those. And you have others that are more or less just kicking the tires. So is there an average or kind of a typical sales process for a big bank or broker dealer? I mean, how are you typically engaging with newcomers? It typically begins with an education and a lot of conversation, even to the point where we'll do one-on-one overview type of sessions for the executive teams, members of the extended team, folks that are not fully dedicated to crypto space at these organizations. And that can be a fairly lengthy process depending on the organization. It does feel like a lot of them are past that now, but we've been working with some of them for 18 months. And I think every client is different, every prospect is different, but it does feel like an entry point for a lot of these organizations is going to be on their research teams where they're maybe going to write a paper. They're going to use our data to write that paper.

Oftentimes it seems like a second step is some sort of a research portal for their clients where they want to make more data available to their clients, maybe alongside other data sets that they already have made available to clients, which are just lots of datasets. And then they start to get into those four functions that they do as an organization, the trading or the lending. So it does seem to me like they kind of do dip their toe in, usually through a less risky venture before they get into their core businesses. Even if we look at sort of the evolution of fidelity, ETF filing, well, that's a core business. But there was a long runway to getting there. So a lot of private blockchain discussions before they got there. It took a while. So you guys have just announced a new round of financing led by Goldman Sachs, a $15 million series B. So talk a little bit about what this means for coin metrics, what it means for the industry, I guess, writ large. We're super excited. It means we have the money to continue to scale our product. It's going to allow us to like rapidly scale some of these things that we have underway, but also to innovate in new areas that are just kind of like percolating in our minds. We're going to need to quickly expand global.

So we're seeing a lot of demand from Europe and Asia. And right now, the folks that are customer facing are primarily here in the U.S. And so that makes those like very, very late night calls, very early morning calls. So it's going to really enable us to sort of sprint, which is what I think we need to be doing right now. But in addition, it's helping us to make our product even better for our community. So we have an announcement actually tomorrow. We're going to be releasing over 100 new metrics to the community. and by building a really great product for our clients and continuing to add to that,

we continue to give back, I think, really great product to the community that supports us and gives us such great feedback and really helps us with some of those early stages of the R&D process. It doesn't hurt our credibility. So I think this is a reputable firm. They do their due diligence. Let's just say that. They're very thorough. and we've already had inbound this week with folks being like,

we're just not going to do indulgence on this because we know you've already gone through that. We're like, awesome. That's what we wanted to hear. It's great that it's also part of the strategic group at Goldman. And so hopefully this pretends big things for Goldman's efforts as well in the space. They've been a great client so far as well. So Katie, I know that from a personal standpoint, you're just fascinated with this technology and you've always been messing around

with the latest wallets and tools over the years, whether that be change tip and giving tips to people like Ryan Selkis for his too-bit idiot blog back in the day. I was actually trying to look that up. I feel like we got an email. Like it was an emailed newsletter that we used to get from that. Yeah, we did. And I thought it was out of like Boston College, but then I went back and I could find any connection to that. Well, Ryan went to BC and then I think had some interns over the years from Boston College. And I think it was a Tumblr blog, but there was a email. But I like to give him a hard time that I sent him quite a bit of Bitcoin over the years that wasn't worth much at the time via change tip. But so anyways, I know that you're always playing

with kind of the latest stuff. From a personal standpoint, what are you finding the most exciting right now in the industry? Where are you spending your time that's not exclusively coin metrics time? Not data. I mean, there's so much that's exciting about the space. I still find kind of the Lightning Network and the Layer 2 technologies to be fascinating. I'm keeping a close eye on sort of the zap strike application. I just think that there's something there. I don't know how that's going to unfold, but it just feels really cool.

And it feels like it's really usable. And it feels like it's going to enable remittances and cross-border payments. And it's one to keep an eye on. I also really think gaming is interesting in this space. So I love Blankos. I remember showing some of the early trailers to my kids, probably I might have even three years ago. And they like both burst out laughing.

It was like this little parody of Fortnite, I don't know what they're called, but Blankos, I think they were like falling from the plane. So I think the whole decentralized gaming has wings. I think there's something there. I think if you see what's happened during the pandemic and all these children and even adults playing a lot more games and they're purchasing a lot of things in these games and they're creating things in these games, I think they're going to want to be able to transfer those across platforms. I think they're going to want to be able to actually own those things that they're buying and that they're creating. I think that's really close. I love mining. I still, I don't know if it's the early days, but I really am fascinated by what's going on there. It really is the infrastructure for this entire space. So I am always interested in talking to miners. We spoke to a couple this week.

But I think what's fascinating is all of these things are just giving the users more control over everything, more control over their money, more control over their gaming, more control over probably their social networking. If you just think about how this all unfolds across a variety of industries, it's amazing and it's almost like hard to wrap your mind around. I don't think everybody fully has. No, I don't think anyone, even myself included, have fully grasped how crazy this is going to get. Yeah, in the mining, I remember the little 21 ink mini-miner machine. Oh, yeah. At some point, we'll have one of those on our hot water heaters, I'm sure. It's a crazy space.

Yeah, another part of the early hypothesis, IOT. I was going to be. Yeah. Yeah. IOT payments, maybe with stable coins. Perhaps. So Katie, where can we send people to learn more about what you're doing at Coin Metrics? Well, if they come through website, Coinmetrics.io. We also have a Twitter account, but two really awesome newsletters.

So State of the Network is available in Substack. You can also subscribe to that to the website and then stay at the market. So you can find us in any of those ways. Reach out to us. We love to talk to you. share your ideas. We have a labs page if you happen to have anything clever that we should be looking at. Submitted there and stay in touch. That's great. Well, congratulations on the fundraise. Thanks so much for joining us today. Yeah. Thanks for having me. It's super fun. Thanks for listening to

another episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island.vc. To listen to all of our podcast episodes, please go to on the brink dashpodcast.com or just click on the tab in our website. Thanks for listening.