Orchestrate all the Things - The state of the crypto industry today: a multitude of blockchains, with smart contracts, DeFi and DAOs on the rise. Featuring Nansen CEO / Co-Founder Alex Svanevik

Episode Date: January 27, 2022

A new comprehensive report is out, using data science and analytics to slice and dice the crypto industry. Add to that insights from the report's authors, and you have the state of the crypto industry today. Article published on ZDNet

Welcome to the Orchestrate All The Things podcast. I'm George Amadiotis and we'll be connecting the dots together. A new comprehensive report is out using data science and analytics to slice and dice the crypto industry. Add to that insights from the report's authors and you have the state of the crypto industry today. I hope you will enjoy the podcast. If you like my work, you can follow Link Data Orchestration on Twitter, LinkedIn, and Facebook. So my name is Alex Svanovic. I'm the CEO and one of the three co-founders at Nonson. My background is in artificial intelligence and data science. I did a few years in management consulting many years ago, and I've been working in the crypto space since 2017, mostly in the intersection of crypto and data. And then a few sort of different events happened where late 2019, we decided to create a blockchain analytics platform, which is Nansen. It was created by or founded by myself, Evgeny and Lars

who are both data engineers. Since my background is in data science that means we're a very data native co-founder team and we felt that you didn't have a good enough product to actually understand what happens on the blockchain in real time. There were some crypto analytics products out there mostly focused on things like anti-money laundering or illicit use of crypto. But there wasn't really a good product for the man in the arena, so to say. So we decided to build this product. And what we do is we pull in data from different blockchains like Ethereum, and then we enrich

that data with our own proprietary wallet labels and behavioral tags. And this means that instead of just seeing what happens on the blockchain, you also get a bit more context on the real world situation around transactions. So who might be sending this transaction to which exchange, for example, instead of just seeing the IDs or the account numbers of the different wallets. And yeah, that allows you to discover new opportunities when it comes to investments. It allows you to perform due diligence. And you can also set real-time alerts with our system. Okay. Sounds interesting. I was kind of imagining it looked, you know, just from a superficial,

let's say, looking at the information available on what you do, it looks pretty much like what you're describing. So actually, if you don't mind, before delving into the core of the report that you just released, I was just a bit curious on whether you could share a few more words on the infrastructure that you use, because obviously it sounds like you scrape a lot of data, so you must be storing them somewhere. And you also cross combine them with data, as you just mentioned, not just coming from the blockchain or wallets and so on and so forth.

But you seem to be also pulling data from other sources. So I was wondering if you could share a few words on what those sources may be and how you sort of correlate everything and then what you use to store and query that data. Yeah, so, you, so the primary data source are the blockchains themselves. But in addition to that, it's true that we actually have a combination of man and machine working together where we can sometimes make inferences

about what certain addresses are based on transactional patterns. So if you know that an exchange controls a specific hub wallet, and then you see lots of other transactions depositing funds into it, sometimes you can draw the conclusion that these other addresses also belong to that exchange. And so a lot of what we do is to create heuristics and algorithms that allow us to tag up at scale. So this is kind of the source for this would be more like our own domain knowledge, which we have translated into various heuristics and algorithms. And then we also have research analysts who, you know, actually make manual investigations.

So you can imagine that there's an address that seems to be collecting funds from a fundraising round, maybe in a private sale. And then a few days later, there's a press release that says that this fund led the round of this investment. Then sometimes we can draw the conclusion that actually the top wallet that sent funds there belongs to that lead investor. Or if you see multiple different funding rounds and they use the same wallets in the different rounds, through the process of elimination, we can figure out which funds own which wallets. So it's really not just one source. There's no kind of silver bullet, but it's a process of combining man and machine and then having an overall architecture and a system in place to overlay all this information on top of the transactional data.

Okay, great. Thank you. And then, so I guess we can come to the actual report that you're about to release. And you cover many different topics in the report. But first, I was wondering if it's the first of its kind or you have potentially released others like this one in the past. Yeah, it is the first that we have released. That's right. So just to give a bit of context,

one year ago, we were about seven people in the team. And now we are more than 80 people. So that means we can do this kind of work. Whereas a year ago, we simply didn't have the bandwidth to make content productions like this. But thankfully, now we have a bigger team. And so this is the first one that we have released. That's right. Okay. Okay. Interesting. So to start from the beginning, I think like any report, any data investigation, speaking more broadly, it begins with what you choose to include, actually. And your choice on the change that you analyzed is interesting. Well, you did include Ethereum. That's kind of an obvious choice. The rest of the change that you chose were, to me at least, not that obvious.

You know, there were some notable omissions. I think you did not include Polkadot, for example, or Cardano. And you also included some chains, which to me, I have have to admit I was not familiar with them so I was wondering if you'd like to elaborate on and just mention the change that you chose to include and why you chose to include them. Yeah so the background on this is probably based on you know what data we support in our own product and there are a few different considerations when you look at what blockchains that we've chosen to support. Maybe the most notable omission is Bitcoin, which, of course, is not a smart contract platform, but it's one that we have not focused on because we feel like there are other products and companies out there focusing on Bitcoin analytics, we would

like to focus more on smart contract platforms like Ethereum. And so we started out only supporting Ethereum. And then we have decided to proceed basically in three phases. The first one is Ethereum only. The second one is chains that are based on the Ethereum virtual machine. So the EVM based chains. And most, actually, all of the chains that you can see on that page are Ethereum virtual machine based chains. And so this means two things. First of all, it means that it has many of the same participants because it's often quite easy to bridge funds from one EVM chain to another one. And it's a familiar experience because you can use the same wallets. For example, MetaMask can be used with all of these different chains. And then secondly, from the technical

perspective, it's easier for us to add support for an EVM chain because we can reuse a lot of the technology to pull out the data. There's actually a third reason as well, which is that you can use the same addresses on different chains. And so when we label and track addresses, that allows us to actually monitor what the activity of a specific address is on Ethereum, but also on BSC or Polygon or Arbitrum. So those are basically the three reasons that we have those chains. I would say also, these are also chains that have had a lot of growth in organic usage. And so if you look at actually all of them, like BSC, Ronin, Avalanche, Polygon, Phantom, Arbitrum, to some extent, extent silo as well they have had a

lot of traction this year and their transaction numbers and number of active addresses have been have been growing across the board uh and if you want i can actually share um separately in case it's useful some some public dashboards that we have for these different chains where you can see how the ecosystems have developed. That would be nice, sure. Thank you. Yeah. So let me just drop it here in the chat. While you're doing that, I was wondering, you said that you foresee a third phase in which you're going to expand beyond chains supporting the Ethereum virtual machine. And I was wondering if you have any insight as to where and when that might happen and what chains you may end up including. Yeah, so the two first chains that we're going to add

support for are Solana and Terra. And the basis or the justification for why we chose those chains is those are the chains we've had the most requests for, simply. So there are very vibrant ecosystems developing around these chains. And there are lots of DeFi protocols that are building on these different chains.

And a lot of the infrastructure is starting to pop up. And that also means that they want to have the best analytics products support their ecosystem so that people don't have to feel like they're transacting in the blind. They want to get the sense that they know where the funds are flowing, they want to know where the activity is most strong. And so it's really a win-win situation for the chain's ecosystem and for us as well, of course, to be able to support other chains. Okay. So, Wyn, I also read some of the findings that you highlighted as key findings and tried to get some insights from that. And something that stood out for me was the fact that you used TVL, so total value locked, as a key indicator for your findings. And

usually, well before now, let's say I was used to seeing that metric being used mostly in the context of DeFi so decentralized funding and I'm wondering how exactly do you define that and whether you apply that well throughout the change that you monitor? Yeah, so total value locked, I think is a kind of debated metric. And I think, unfortunately, it's been used as the one metric to rule them all when it comes to DeFi. And in many cases, it doesn't really make sense.

So it makes sense for DeFi protocols where you get some kind of returns or yields on the total value locked. So how much funds are being locked in smart contracts? That's how I would define it. And when I say locked, basically held in custody by the smart contracts. But for something like Uniswap V3, this was designed specifically to have a low TVL, but to still have a good low slippage. So competitive pricing. So it's not a metric that makes sense across the board, but it is still a very important metric to understand where the money is sitting. And so, you know, Ethereum by far has the, you know, largest TVL of all chains, but there are a few other metrics

that we also highlighted here. For example, contract deployments, where you have actually seen a decrease in Ethereum this year. And then of course, there's also gas price, which has been fluctuating, but generally has been fluctuating but generally has been very high for Ethereum the whole year. So another thing that stood out for me was that just

scanning through the report it looked like there was a slight bias let's say in favor of smart contracts and well I don't have to guess anymore because you just mentioned that yourself previously when you introduced the report that you said you're basically focused around smart contracts. I think that's a decision that makes sense at least it resonates with me. I see

that as being the key driver to the evolution of blockchains and perhaps well the key application let's say, even though it's not an application per se, it's something you can use to build applications, but well, the key enabler, let's put it that way. So what, and obviously, since you share that, you seem to be sharing that, that view, I was wondering if you'd like to share also, what do you see as the key features for smart contracts and what are the key platforms to keep an eye on? Even though I guess the latter part you probably already answered in part by elaborating on why you chose the change that you chose.

Yeah, I think smart contracts are very interesting for a few different reasons. So probably the first one is that they are unique in that they are autonomous. They don't need someone to invoke them, right? They are basically always up, always working, assuming that there are no bugs or vulnerabilities in the smart contracts. But you can send funds to a smart contract,

and it does what you expect it to do if you can read the code behind it, presuming that it's open source. And so this is a key feature where effectively you can have autonomous applications that can run 24-7 just because the network of miners or validators for Ethereum 2, for example, continues to run. So that's probably the first thing that makes them quite unique. The second thing is that they effectively allow for composability and permissionless innovation. So if you have made a smart contract, which allows people to perhaps borrow and lend capital,

I can build a derivatives platform that makes use of your smart contract as one of the building blocks. I don't have to build that out myself. And so that means that you can almost get an exponential increase in innovation as people put these money Lego blocks together. And so this notion that smart contracts are composable and not just composable, but permissionlessly composable, I don't have to ask you for permission to use it. I can simply start building on top of it and use it right away. That's really a unique feature to the whole blockchain space, which is one reason why you see so much innovation. So I think I would highlight those two things. And perhaps the third thing is also the transparency that you get with smart

contracts. So if you compare it to a fintech product that has been built on legacy traditional finance infrastructure you don't really know if that business is solvent you have to rely on reports that they put out but with smart contracts you can always inspect the state assuming that the smart contract has published the code behind it which is often a prerequisite for people to actually use it in the first place because they want to know what they're interacting with, then you can also know exactly how it functions and so people can audit it in real time. So I would say those are probably the three main characteristics that make smart contracts interesting, that they are autonomous, that they allow for permissionless composability, and that they're transparent.

So those are probably the three main characteristics that I think are interesting for smart contracts. As far as transparency goes, I agree. Well, yes, in theory, you do have the option to audit them. In practice, of course, that depends on, well, how technically capable a person is, actually. So I wonder if you have such requests, like people coming to you and asking you to audit certain smart contracts just to make sure that they make they make sense for them to to use or invest in yeah that's a great question and there's definitely not just demand for auditing services

but this is already a thriving business within the crypto space and uh you know at some point effectively all the recognized auditing firms smart smart contract auditing firms, which are very niche specialists in this area, were pretty much booked. They didn't have enough bandwidth to serve all the different developer teams that wanted to get their own smart contracts audited. So certainly there is a demand for it, both from the projects that are putting out

new smart contracts and want to show to the world that they have been audited by technically capable and independent auditors. But there's also demand on the investor side, right? So either you might have a contract that hasn't been audited and investors, of course, then want to audit it before they put funds into it. But also sometimes you might have had audits, but you would want to get even more audits to be totally sure how it works.

So there is a demand for it. We don't really offer that service. It's not part of our expertise, but it is absolutely something that there's huge demand for. And it's a very lucrative business to do auditing because there's a lot of money involved and money at stake. And I think you're right that at the moment, you know, that ironically creates kind of another middleman, namely the auditor, right, which is kind of the problem of that blockchain started to solve. At the same time, I think there is kind of the the problem of uh that blockchains are tended to solve at the same time i

think uh there there is kind of some game theory here where just knowing that someone can audit what you are doing that makes it less likely that people will design sort of malicious code or even get away with it so there's there's also i would say in addition to the auditing business there's also, I would say, in addition to the auditing business, there's also a lot of community efforts to share information about which contracts are actually safe. There are lots of very technically capable developers who will look over the contracts of other projects, especially as they start getting a lot of capital deposited into them. So I think it is a business, but there's also some unique characteristics of the crypto industry where there's a community effort to try to make it easy for people to get some clarity and safety. But it is definitely high risk still. And we see a lot of vulnerabilities that make it past auditors and can actually go

unnoticed for a pretty long time. So it's certainly an area where people need to understand that there's high risk involved with putting money into smart contracts. Yeah, I think a lot of it has to do with maturity really because when you're talking about running code in distributed systems, basically, this is a notoriously complex thing. And you only get to weed out all the bugs or inefficiencies over time. So maturity has a lot to do with that as well. 100%. And I think this is kind of nicely captured in the Lindy effect, right? Where if something has lasted for a long time, it's more likely to not break tomorrow it's more likely to also survive for another x years so i think one thing that uh that we have that we've thought about and perhaps we should do is to have a very simple lindy score uh which uh which

could take into consideration two things number one how long has the smart contract existed? And number two, how much capital has it actually held? So if you sort of take the product of those two things, that can give you a score, which gives you an indication of how many billion dollar years has a smart contract actually existed. And the higher that score is, the less likely it is to

have a vulnerability at the end of the day. Okay so moving then from smart contracts to another focus area for the report which is DeFi. So which is kind of built on smart contacts really and I was wondering if you could just quickly share a few key players that you have included and your overall outlook and something more specialized question, if you will. I saw that you focused on what you call institutional adoption. So organizations actually investing in DeFi. And I'm wondering, again, how exactly do you define that and how were you able to keep track of that? Yeah, so on DeFi specifically, I mean, we've included a few here, Uniswap, Aave and Lido.

So Uniswap is the most used application on Ethereum, which is also visible in one of the earlier slides where you can see the gas usage. And it's actually quite impressive how dominant Uniswap is in terms of transactional activity on Ethereum. Often it's been 30% to 40% of the gas consumption among the top 20 entities. So Uniswap is definitely a big one. And there was version three, which as I mentioned earlier, is a more capital efficient way to provide liquidity, which allows you to set bands where you're okay to provide liquidity within that range. In the past, you had a more

capital inefficient version where as a liquidity provider, you effectively had to spread out your capital across like an infinite range, which is not actually very efficient. So with Uniswap, that's certainly a big project that gets used actually the most of all DeFi applications and actually all smart contracts on Ethereum in general. Then we also have Aave. Let me see if I can just find the slide here. And it's actually a lot of slides. I'm almost getting lost here in the deck.

Here we go. Yeah. So I think one thing that we could look at there is how many transactions are being made and how many active addresses there are. So with Aave, that's a different application where you're effectively putting money into Aave and then you can borrow money against it, or you can earn interests on your capital. And Lido is actually a decentralized staking pool for Ethereum 2. So to keep it very simple and short, it's a way for you to earn yields on your Ethereum by not having to bother with the hassle of running a validator on Ethereum 2. Instead, you can put these funds into a pool,

and then Lido, the project, will manage a pool of validators that basically earn the yields for the depositors. But crucially, it is liquid. So that means as you deposit these funds in, you can actually exit your position again because you have a token that gives you proportional ownership of the pool. So you can also exit again later on. And yeah, it's been quite impressive to see how fast Lido has grown and has actually become the dominant provider of Ethereum into the Ethereum 2 ecosystem. So yeah, that's why it's included here.

Okay. I see. And then, yeah, I didn't touch on the institutional question. I would say in brief, it is pretty hard to measure exactly like what's institutional and what's individuals with just large amounts of capital. I would point out two things. First of all, we monitor a lot of funds in the space. We can see their activity. It could be VC funds, it could be market makers, it could be liquid hedge funds and so on. And many of them are highly, highly active. Many of the market makers are among the top addresses in volume on Ethereum and other blockchains. That's the first point. And the second point is that anecdotally, we see a lot of interest of people coming to us actually to learn more about the space from traditional venture firms, for example, who've finally kind of been won over

and they realize that crypto is the future and they want to understand it better. So we have a lot of interest as well with venture capital funds and also some hedge funds and traditional finance players that are trying to make the move into crypto now. So that's been actually, we've seen a lot of interest in that last year. Okay, I see. And last but not least, another thing that stood out for me in the report is the fact that you included DAOs, so distributed autonomous organizations, as opposed to smart contracts and DeFi.

I don't think I have seen previous interest in analyzing this space. And I was wondering, again, if you could share why you chose to do that and what do you think matters in analyzing this space? Yeah, DAOs are interesting and they've been around for many years at this point, but they're constantly evolving. I think it's important to study DAOs because first of all, they are quite powerful these days

in the sense that they manage a lot of capital. Second of all, it's the de facto way to organize DeFi protocols, treasuries, for example, and to manage the roadmap. So if you have a decentralized application, let's say like Aave, there can't really be a centralized entity, a sort of legal entity behind that. There should be some decentralized organization that governs parameters of how the application works. And these projects might also have a treasury from having raised capital or from accruing revenues from usage. And so you need to have some form of organization that manages the treasury

and manages the parameters of these protocols. So there's a natural need for DAOs. And as you get more DeFi protocols, you also have a natural need, increasing need for DAOs. And so this is just, I think, a natural function of the DeFi space growing. And you can see also DAOs not just being used in DeFi, but also in NFT contexts, right?

Like PleaserDAO, which I happen to be a member of myself in the beginning, is an art collecting DAO, right? Where there's effectively a treasury of NFTs that is managed by collecting DAO, right? Where there's effectively a treasury of NFTs that is managed by this DAO. And there are different membership groups like Friends with Benefits, which we have in the report here, where you can see a native token

and you can see how the price has evolved as well as the volume for trading it. And, you know, I think most people want transparency when it comes to organizations. And that's not unique to DAOs. It's the same with corporate corporations. It's the same with governments. And I think if DAOs are to be, you know, to reach their full potential, you need to have maximum transparency. And that's, you know, one of the reasons why we focus on DAOs. Yeah, I think that makes sense. And actually, as you said, DAOs are not strictly

applied to smart contracts, to DeFi. They can apply to any sort of organization for any kind of purpose. So yes, I think also they're one of the most interesting aspects of blockchains in general. So yeah, the rationale for including them resonates with me at least. And again, what I wanted to ask you on that is, what kind of metrics did you choose to use to evaluate the different DAOs? And how do you measure those? I would say in the report, we've only given kind of like a teaser, right? There's so much more we could do.

And, you know, again, actually, TVL could be a good metric. We've shown the token price, so how much it costs effectively to be a member in one specific DAO as an example, and also the traded volume, which indicates interest. But we have also shown that you can see who are the top recipients of tokens, which gives an indication of who is active in these different DAOs, as well as the flow of funds. So I would say that what we have given here is it's just a teaser. And there's a lot of stuff that you have to look at for DAOs. TVL is one. We can look at how much funds are being managed by DAOs or AUM, if you will, assets under management. And then you also have to consider that DAOs, every DAO is unique in some sense, right?

It's almost like a very general version of how to organize humans. There are different ways to do that with different rules, with different voting systems. And so that makes it also hard to find one set of unified metrics that matter to all of them. But I do think that assets under management could be one that's good. Of course, the general interest in volume, so trading volume of these different DAO tokens is another one. Yeah, you're right. And that's why it kind of piqued my interest, because like you said, there's many different ways you could look at this issue. So some of the things that you mentioned previously about smart contacts could also apply to DAO.

So how long it has been around, for example, or how many people participate in the decision-making or what's the structure? So do many people get to vote? You can think of many, many meaningful metrics to keep track of there. Absolutely. Yeah, fully agree. I hope you enjoyed the podcast.

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