645 Ventures Investment in Solidus Labs

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By Nnamdi Okike and Meha Patel

The growth of cryptocurrencies and the emergence of blockchain over the past decade has sparked a growing wave of innovation. As 645 assessed where we are in the innovation cycle, we have found that crypto and blockchain innovation follows the framework outlined by Geoffery Moores Crossing the Chasm. (1) In the first phase, technology enables innovators to access basic innovation. In the case of crypto, this first phase was primarily the creation of bitcoin, followed by currencies such as Ethereum, which catalyzed the creation of blockchain applications.

In the second phase, core innovation shifts from innovators to early adopters, and new technology is needed to accelerate and simplify this adoption. Crypto exchanges and wallet providers such as Coinbase and Binance provide the enabling technology that has made it possible for cryptocurrencies to be purchased, stored, and managed more easily by a larger percentage of the population. Other companies have sprung up in areas such as token storage, custody, and merchant services, raising significant capital.

We are now entering phase three, as adoption shifts from early adopters to early majority, and crypto and blockchain evolve from predominantly speculative and commercial use cases to practical adoption in the day-to-day life of businesses and businesses. individual. We see it in the rise of blockchain applications, such as NFTs and blockchain games, as well as the growth of DeFi, which promises to transform our financial system.

In this third phase, infrastructure software vendors will be critical to enable wide adoption. These players reduce the risk of adopting the underlying technology, which can be important early on. When it comes to crypto, one of the biggest barriers to adoption is financial crime, malicious activity, and fraud, which can be rampant. In 2020 alone, cryptocurrency-related financial crime generated $ 10.5 billion in ill-gotten gains, according to blockchain analyst firm Confirm (2). This type of risk can prevent the adoption of a technology by the early majority, which in this case refers to important players in the financial services market.

As a result, we believe that companies providing this new layer of crypto infrastructure software will be critical in reducing the risk of adoption in the third phase. Solidus Labs is a company that provides this much needed infrastructure for crypto and is proud to announce our participation in the company’s Series A funding cycle.

Solidus has created the first automated, comprehensive and testable market surveillance and risk monitoring hub adapted to digital assets. Their software enables a wide range of crypto market participants, including exchanges, banks, crypto funds, and government regulators, to detect, investigate, manage, and analyze crypto transactions. Solidus was founded by Asaf Meir, Praveen Dosodia and Chen Arad. While working at Goldman Sachs, the team identified several pain points in the adoption of crypto. They realized that traditional securities fraud prevention, monitoring and control software were insufficient to meet the needs of digital assets. This is because cryptocurrencies introduce new market structures, data structures and trading workflows that are different from traditional securities. These new realities have introduced forms of trading manipulation at volumes that have not been seen in traditional stock markets. For example, just two years ago, crypto firm Bitwise Asset Management estimated that up to 95% of reported crypto trading volume was fake. (3)

As a result, new infrastructure platforms are needed to enable continued growth in institutional demand for digital assets, which has accelerated in recent years. For example, institutional volume has grown as a percentage of Coinbases trading volume, from 20% in Q1 2018 to over 64% of volume in Q4 2020. (4) Moreover, in the last few months alone, Goldman Sachs announced the restart of its crypto trading desk (5) and NYDIG has partnered with Fidelity to enable banks to offer bitcoins to their clients (6). Institutional investors and large financial firms are experimenting with digital assets and putting in place the financial systems and controls to trade and own those assets, which will eventually move crypto to the next phase.

Solidus has already signed an impressive roster of clients, including crypto exchanges, financial service providers and regulatory agencies, and has assembled a top-notch team, with offices in New York and Tel Aviv, and expansion. planned in London. We are proud to invest alongside lead investor Evolution Equity Partners, as well as Avon Ventures, backed by Fidelity, and the crypto derivatives exchange FTX. Also joined by a list of angels that includes former CFTC chairman Christopher Giancarlo, former SEC commissioner Troy Paredes and AngelList founder Naval Ravikant.

Our investment in Solidus reflects our broader goal of investing in software companies that provide critical infrastructure to address new issues that arise as crypto adoption continues to accelerate. These issues include data risks, potential fraud, loss of privacy and identity, damage to reputation, and exposure to highly speculative currencies. Just as the widespread adoption of the internet has brought new risks that businesses and consumers had not previously considered, the widespread adoption of digital assets presents unique risks.

Finally, in addition to software that reduces new risk, we were also looking for platforms that support digital asset adoption in areas such as tax, accounting, reporting and portfolio management. We believe that as digital assets reach the same level of adoption as traditional financial instruments, businesses and consumers will need a new set of financial management tools to protect their investments. We were excited to partner with founders who are living in the future and building the infrastructure for all of us to reap the benefits of crypto and blockchain technologies.

(1) For a detailed description of Crossing the Chasm and how the framework applies to startups, see Geoffrey Moores’ interview with Mike Maples on Starting Greatness: https://greatness.floodgate.com/episodes/ why-geoffrey-moores -traverser-le-gouffre-est-a-must-read-for-the-ambitious-founders-of-startup-P24oXmfg

(2) https://www.google.com/url?q=https://www.coindesk.com/crypto-crime-siphoned-off-nearly-10-5b-in-2020-research&sa=D&source=editors&ust = 1621895179868000 & usg = AOvVaw1gghTUj74sZl1n7qTC3VCi

(3) 95% of reported Bitcoin trading volume is false, says Bitwise, Forbes.com, at https://www.forbes.com/sites/cbovaird/2019/03/22/95-of-reported -bitcoin-trading -volume-is-fake-says-bitwise /? sh = 1da841a96717.

(4) Coinbase Institutional, Retail Trading Volume Increased at Equal Rates in 2020, Coindesk, at https://www.coindesk.com/coinbase-institutional-retail-trading-volume-ipo.

(5) https://www.reuters.com/business/finance/exclusive-goldman-sachs-restarts-cryptocurrency-desk-amid-bitcoin-boom-2021-03-01/

(6) https://www.cnbc.com/2021/05/05/bitcoin-is-coming-to-hundreds-of-us-banks-says-crypto-firm-nydig-.html

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