Compound wants to let you borrow cryptocurrency, or lend it and earn an interest rate. Most cryptocurrency is shoved in a wallet or metaphorically hidden under a mattress, failing to generate interest the way traditionally banked assets do. But Compound wants to create liquid money markets for cryptocurrency by algorithmically setting interest rates, and letting you gamble by borrowing and then short-selling coins you think will sink. It plans to launch its first five for Ether, a stable coin, and a few others, by October.
Today, Compound is announcing some ridiculously powerful allies for that quest. It’s just become the first-ever investment by crypto exchange juggernaut Coinbase’s new venture fund. It’s part of an $8.2 million seed round led by top-tier VC Andreessen Horowitz, crypto hedge fund Polychain Capital and Bain Capital Ventures — the startup arm of the big investment bank.
While right now Compound deals in cryptocurrency through the Ethereum blockchain, co-founder and CEO Robert Leshner says that eventually he wants to carry tokenized versions of real-world assets like the dollar, yen, euro or Google stock. That’s because Leshner tells me “My thesis is that almost every crypto asset is bullshit and not worth anything.”
How to get Compound interest on your crypto
Here’s how Compound tells me it’s going to work. It’s an “overnight” market that permits super-short-term lending. While it’s not a bank, it is centralized, so you loan to and borrow from it directly instead of through peers, alleviating you from negotiation. If you loan, you can earn interest. If you borrow, you have to put up 100 percent of the value of your borrow in an asset Compound supports. If prices fluctuate and your borrow becomes worth more than your collateral, some of your collateral is liquidated through a repo agreement so they’re equal.
To set the interest rate, Compound acts kind of like the Fed. It analyzes supply and demand for a particular crypto asset to set a fluctuating interest rate that adjusts as market conditions change. You’ll earn that on what you lend constantly, and can pull out your assets at any time with just a 15-second lag. You’ll pay that rate when you borrow. And Compound takes a 10 percent cut of what lenders earn in interest. For crypto-haters, it offers a way to short coins you’re convinced are doomed.
“Eventually our goal is to hand-off responsibility [for setting the interest rate] to the community. In the short-term we’re forced to be responsible. Long-term we want the community to elect the Fed,” says Leshner. If it gets the interest rate wrong, an influx of lenders or borrowers will drive it back to where it’s supposed to be. Compound already has a user interface prototyped internally, and it looked slick and solid to me.
“We think it’s a game changer. Ninety percent of assets are sitting in people’s cold storage, or wallets, or exchanges. They aren’t being used or traded,” says Leshner. Compound could let people interact with crypto in a whole new way.
The Compound creation story
Compound is actually the third company Leshner and his co-founder and CTO Geoff Hayes have started together. They’ve been teamed up for 11 years since going to college at UPenn. One of their last companies, Britches, created an index of CPG inventory at local stores and eventually got acquired by Postmates. But before that Leshner got into the banking and wealth management business, becoming a certified public accountant. A true economics nerd, he’s the chair of the SF bond oversight committee, and got into crypto five years ago.
Sitting on coins, Leshner wondered, “Why can’t I realize the time value of the cryptocurrency I possess?” Compound was born in mid-2017, and came out of stealth in January.
Now with $8.2 million in funding that also came from Transmedia Capital, Compound Ventures, Abstract Ventures and Danhua Capital, Compound is pushing to build out its product and partnerships, and “hire like crazy” beyond its seven current team members based in San Francisco’s Mission District. Partners will be crucial to solve the chicken-and-egg problem of getting its first lenders and borrowers. “We are planning to launch with great partners — token projects, hedge funds and dedicated users,” says Leshner. Having hedge funds like Polychain should help.
“We shunned an ICO. We said, ‘let’s raise venture capital.’ I’m a very skeptical person and I think most ICOs are illegal,” Leshner notes. The round was just about to close when Coinbase announced Coinbase Ventures. So Leshner fired off an email asking if it wanted to join. “In 12 hours they researched us, met our team, diligenced it and evaluated it more than almost any investor had to date,” Leshner recalls. Asked if there’s any conflict of interest given Coinbase’s grand ambitions, he said, “They’re probably our favorite company in the world. I hope they survive for 100 years. It’s too early to tell they overlap.”
Conquering the money markets
There are other crypto lending platforms, but none quite like Compound. Centralized exchanges like Bitfinex and Poloniex let people trade on margin and speculate more aggressively. But they’re off-chain, while Leshner says Compound is on-chain, transparent and can be built on top of. That could make it a more critical piece of the blockchain finance stack. There’s also a risk of these exchanges getting hacked and your coins getting stolen.
Meanwhile, there are plenty of peer-to-peer crypto lending protocols on the Ethereum blockchain, like ETHLend and Dharma. But interest rates, no need for slow matching, flexibility for withdrawing money and dealing with a centralized party could attract users to Compound.
Still, the biggest looming threat for Compound is regulation. But to date, the SEC and regulators have focused on ICOs and how people fundraise, not on what people are building. People aren’t filing lawsuits against actual products. “All the operations have flown beneath the radar and I think that’s going to change in the next 12 months,” Leshner predicts. How exactly they’ll treat Compound is up in the air.
One source in the crypto hedge fund space told me about forthcoming regulation: “You’re either going to get annihilated and have to disgorge profits or dissolve. Or you pay a fine and you’re among the first legal funds in the space. This is the gamble you take before asset classes get baptized.” As Leshner confirmed, “That’s the number one risk, period.”
Money markets are just one piece of the financial infrastructure puzzle that still needs to emerge around blockchain. Custodians, auditors, administrators and banks are still largely missing. When those get hammered out to make the space safer, the big money hedge funds and investment banks could join in. For Compound, getting the logistics right will require some serious legal ballet.
Yet Leshner is happy to dream big despite all of the crypto world’s volatility. He concludes, “We want to be like Black Rock with a trillion under management, and we want to have 25 employees when we do that. They probably have [tens of thousands] of employees. Our goal is to be like them with a skeleton team.”
News Source = techcrunch.com
A16Z and Founders Fund sink $28M into IRL asset blockchain Harbor
Harbor helps businesses legally issue cryptocurrency tokens that represent ownership of real-world assets like real estate, fine art, company equity, and investment funds. This “tokenization” might sound boring, but it could be a big business that unlocks trading of illiquid property.
Harbor‘s intention to become a fundamental bridge between the offline and crypto economies has attracted a $28 million strategic round led by Founders Fund and joined by Andreessen Horowitz, Pantera Capital, and more. Following its $10 million Series A in February, Harbor has now raised over $40 million to dissolve the legal barriers to private securities tokenization.
“We think there’s going be a far greater appetite for owning real-world assets using the blockchain” than digital only cryptocurrencies, Harbor CEO Joshua Stein tells me. He expects it be like the impact “email had on snail mail”, but with value instead of content being sent back and forth. Once someone like Harbor handles the technical necessities to make transfers instant, free, and secure, people will exchange a lot more frequently.
Here’s how Harbor works. Clients pay it in cash to make their tokenization of an IRL private security legal. Traditional trading of these assets can be complicated and expensive given there are often financial regulations or licensing requirements restricting who can buy and sell them. For example, foreigners or unaccredited investors without enough net worth aren’t allowed to own certain securities. The lawyers to handle these sales can be expensive, and the process can take weeks.
Normally, businesses have to be very careful about who they let buy these securities because they’re liable for a 20-year criminal sentence if they violate SEC law. With Harbor, a white list of eligible owners is established by an outside law firm that takes responsibility, and Harbor’s smart contracts refuse to process an illegal sale. Harbor effectively bakes securities law compliance like know-your-customer and anti-fraud/money-laundering into the tokens themselves so trades can happen instantaneously without legal assistance on every sale.
Harbor is hoping to launch this Regulated Token (R-Token) system with its first client this summer. The tokens are ERC-20 compatible so they can be sold on lots of cryptocurrency exchanges and stored in popular wallets. Stein stresses that investors will have to trust the underlying securities they’re buying. But they’ll get more trust in who owns something through blockchain transparency rather than some signed contract locked in a desk or vault somewhere. And they won’t have to trust who they’re selling to since the smart contracts only execute the trade if its legal.
The idea of making the way hugely valuable assets trade faster, easier, and cheaper led Harbor’s latest round to be oversubscribed. That’s even though it only came out of stealth two months ago from Craft Ventures, the fund and incubator run by PayPal mafioso David Sacks who sold Yammer to Microsoft.
Craft Ventures, Vy Capital and Valor Equity Partners joined this that included other new investors like Future Perfect Ventures, 1confirmation, Abstract Ventures, and Signia Venture Partners. Nicolas Berggruen of Berggruen Holdings, Napoleon Ta of Founders Fund, and Kyle Samani and Tushar Jain of Multicoin Capital also put in their personal money. Sacks knew Ta, which set up Founders Fund to lead the round. Meanwhile, Stein says Harbor wanted to team up with Andreessen Horowitz partner and crypto thought leader Chris Dixon.
Harbor will have to compete with the other blockchain-for-securities startups like Polymath, which runs entirely decentralized and trustless infrastrucutre to the point that you have to hope strangers want their deposit back enough not to screw you on legal compliance, and tZERO, which is building its own full-stack compliance system. Harbor’s reliance on outside legal firms to build the smart contract white lists makes it more akin to a traditional financial player.
Harbor could make a lucrative business out of letting clients sell American securities to the Chinese market, which has shown a strong interest in crypto assets. Stein talks about “a crypto nirvana of a trustless environment” like a true Bitcoin bro. But his new A-list investors show Harbor is no pump-and-dump.
News Source = techcrunch.com
Coinbase buys Earn.com and makes CEO Balaji Srinivasan its first CTO
Coinbase, the prominent cryptocurrency exchange, has announced its most significant piece of M&A to date after it agreed to buy Earn.com, the U.S. startup that uses the blockchain for its paid-email service, in a deal worth over $120 million. In additional, Coinbase has appointed Earn.com co-founder and CEO Balaji Srinivasan as its first CTO, while the rest of the team will transition over, too.
The deal doesn’t come as a complete surprise since Coindesk reported last month that Coinbase and Earn.com were in talks over a deal.
This is Coinbase’s fifth acquisition to date — its most recent was a deal to buy Cipher Browser last week — and its largest outlay so far. Neither party is saying exactly how much Coinbase is paying, but Srinivasan told TechCrunch in an interview that the deal represents a positive return on investment for those who backed Earn.com, which was formerly known as 21. The company had raised more than $120 million from investors, according to Crunchbase data, which gives some idea of the total deal package.
All of Coinbase’s previous acquisitions have centered around talent, for example, last week’s Cipher deal sees highly-rated developed Peter Kim join the Coinbase ranks. That seems to be a major motivator for landing Earn.com, despite a high price and a product that both Srinivasan and Coinbase CEO Brian Armstrong intend to “double down” on post-acquisition.
A Stanford graduate who holds a BS, MS, and PhD in Electrical Engineering and an MS in Chemical Engineering, Srinivasan is highly-prized in Silicon Valley. He sits on the board at power investor firm Andreessen Horowitz and is known for being an early evangelist of cryptocurrencies and blockchain technology. (He once told me that he tipped Uber drivers in bitcoin in its early days, going so far as to set up Coinbase wallets for them while in their back of their car as they took him to his destination.)
It’s not a secret that Coinbase has struggled to fill its vacancies with talent, and that has extended to the CTO role. Bringing in a name as big as Srinivasan is a major coup for the company and, with the startup said to be paying some of its talent more than $1 million per year in salary, it doesn’t make you wonder how big a factor landing Srinivasan is in making this deal happen.
More importantly for Andreessen Horowitz, Qualcomm Ventures, Khosla Ventures and other backers of Earn.com, this deal with Coinbase — which includes cash, stock and crypto — represents a turnaround in fortunes for the startup.
Founded as secretive bitcoin mining operation ’21E6′ in 2013, the company quickly raised over $100 million but struggled as the price of bitcoin fell and expensive operational costs weighed it down.
Srinivasan was an initial co-founder but he stepped back from daily operations to take a full-time role with Andreessen Horowitz as the startup got going. He returned to the fold as CEO role in 2015 when, he explained, the company had less than a year in runway having wracked up large capital commitments that it couldn’t pay back, even with millions of dollars of mining profit each month.
Alongside CFO Lily Liu, Srinivasan refocused the company to offer a service that rewards users financially for answering emails and completing tasks. Today, he said, the company — which was renamed to Earn.com last year — is profitable with revenue at an eight-digital annual rate run with “hundreds of thousands” of users.
“With Coinbase’s user base and distribution muscle, I think it could hit $100 million in ARR in a few months,” Srinivasan told TechCrunch. “I’m proud of the fact that we turned what could have been a disaster into a successful product and I’m excited about the road ahead.”
It is fairly easy to dismiss Earn.com as Silicon Valley hyperbole — the fact that Mark Andreesen will answer your email in return for a $100 donation to Black Girls Code may be neat but it is not game-changer — but the company’s product gets interesting when you consider it at scale.
Srinivasan explained how the ability to reach hundreds of domain experts with questions — for example AI engineers about their next career move, or expectations for how the industry matures — starts to become a powerful tool, particularly when the surveyor pays based on results. That’s a very different proposal to existing intelligence services, and it has found success among some tech industry verticals.
Lately, Earn.com has branched out into token-based incentives for tasks, and it launched a platform that allows companies preparing to hold an ICO to airdrop tokens to Earn.com users in exchange for answers, opinions and other feedback.
Writing in a blog post for Coinbase — which interestingly focuses heavily on Srinivasan’s arrival at the company — CEO Armstrong called Earn.com “arguably one of the earliest practical blockchain applications to achieve meaningful scale.”
It’ll be interesting to see what Coinbase does with it, particularly around product integrations.
Perhaps of more significance is what Srinivasan does in his new role.
Acknowledging what many perceive as Coinbase’s conservative approach to cryptocurrencies — it offers users the chance to buy only four — Srinivasan said a large part of his role is to look at emerging technologies.
“There’s a lot of amazing stuff happening,” he told TechCrunch. “Atomic swaps, sharding, plasma, proof of stake, etc, and a big part of my job will be to take all of that stuff, and rank it based on whether we can use it to create new products for our users.”
Another part, he mentioned, will be evangelizing the concept of blockchain itself beyond just the cryptocurrencies as investments. So you can expect him to pop up at events and generally have a wider presence in the media as Coinbase looks to cement its position as a blockchain and crypto leader.
Srinivasan will also continue to be involved with Andreessen Horowitz, and at Coinbase he’ll be part of the company’s recently announced investment arm, Coinbase Ventures.
“Every once in a while, a company comes along that is the start button for a technology,” Srinivasan said, citing companies like Microsoft (Windows) and Facebook and their roles in igniting the next phases of technology development.
“If you control and build that onboarding process, then you can build everything else downstream. If you do it right, then Coinbase goes from the place people build cryptocurrency to the place where blockchain technology is built.”
Coinbase is certainly trying to move in that direction with the fund — which follows the wider trend of crypto companies getting into investment — while the recent hiring of former LinkedIn M&A head Emilie Choi has advanced the M&A piece with three deals announced in 2018 alone.
Note: The author a small amount of cryptocurrency. Enough to gain an understanding, not enough to change a life.
News Source = techcrunch.com
Energy-saving Bitcoin rival Chia raises from A16Z, plans mini-IPO
Bram Cohen invented torrenting. Now he’s building a cryptocurrency called Chia that doesn’t waste electricity like Bitcoin, and top investors are lining up. Chia has just raised a $3.395 million seed round led by AngelList’s Naval Ravikant and joined by Andreessen Horowitz, Greylock and more. The money will help the startup build out its Chia coin and blockchain powered by proofs of space and time instead of Bitcoin’s energy-sucking proofs of work, which it plans to launch in Q1 2019.
But that’s just the start of Chia’s ambitious plan to disrupt Bitcoin. It’s avoiding the often-abused ICO process that Chia president Ryan Singer says comes with “a lot of issues with regulatory uncertainty and investor protection.” Instead, it’s working with its general council and the SEC to do a mini-IPO this summer or fall through the JOBS Act’s Regulation A+ equity crowdfunding rule. That could let Chia raise a maximum of $50 million from the public, non-accredited amateur investors included.
“People who buy in an ICO are uncertain of how the company will spend the money and how they’ll get the things they were promised,” says Singer, who was COO of cryptocurrency exchange Tradehill and started several other blockchain companies. “We’re going to operate the company with the transparency and accountability expected of a public company, which is very different than most ICOs.”
Chia will do a pre-mine of its currency but initially retain ownership of 100 percent of the coins, using the mini-IPO to foster a community of investors. “We’re planning on issuing a dividend of Chia to our shareholders in advance of the network launch,” says Singer. “This ensures we can get it in people’s hands to use on the network without marketing and selling it as a security or investment opportunity.”
Because the public offering is capped at $50 million, Chia will use an auction where investors choose how much they’ll bid for how many shares. It’s similar to the process Google used to IPO. The more popular it is and higher people bid, the less equity Chia will have to sell to get the $50 million. Once a clearing price is locked in, everyone who bid below it will get no shares and their deposit back, while those who bid over get their shares plus a refund of the difference between their high bid and actual price.
“This may be the first fully compliant public offering for a crypto company,” a Chia spokesperson writes.
The killer feature in crypto: Legitimacy
After Cohen invented the torrenting file transfer protocol in 2004 and co-founded a company around it called BitTorrent, the startup suffered through a decade of mismanagement by other CEOs. So this time around, he seems determined to keep control, holding the CEO title himself. Still, Singer the businessman has been the one orchestrating the fundraises and growing Chia’s team to six, while Cohen works to derisk the startup’s complex technical roadmap.
“There’s been a fair amount of pretty deep algorithmic work and that’s been going quite well, but these are things that have to be taken seriously,” says Cohen, who makes maddeningly difficult handheld 3D puzzles in his spare time. “You absolutely must worry on a technical level about all the ways something could go wrong because building secure distributed databases is hard.” It’s quite a statement from a guy who built the protocol BitTorrent said at one point moved 40 percent of world’s internet traffic per day. Chia is now aggressively hiring engineers with experience in decentralized network protocols, math and cryptography to lay the code for its coin launch.
They’ll be working on an alternative to Bitcoin’s proofs of work, which require CPUs and GPUs that drain huge amounts of electricity in order to verify the blockchain. This has led to massive Bitcoin mining pools that split the proceeds while operating near cheap electricity sources and cold air to cool the mining rigs, like in the Pacific Northwest. These centralized teams of miners threaten to allow manipulation of Bitcoin’s price and network.
Chia ditched proofs of work for proofs relying on file storage space that people often have sitting around unused on their computers and can use for free. Chia layers on proofs of time that thwart a range of attacks on proofs of space. It’s also building in “non-outsourceability” that prevents mining pools from forming. Essentially, anyone in a Chia mining pool could secretly run off with the rewards without sharing them, so no one will want to trust their fellow miners not to rip them off.
Cohen believes these features of Chia will fix both the electricity waste and centralization of Bitcoin.
“Do you have a white paper?” he says people ask, referring to the often vague, theoretical and unverified claims the blockchain companies make about their technology. “We have actual papers in refereed journals,” Cohen laughs. Chia had a peer-reviewed article published in the 38-years-running cryptography conference AsiaCrypt’s journal.
The regulated public offering, the scientific rigor and the seed round joined by True Ventures, Danhuacap, DCM and Ravikant’s MetaStable crypto hedge fund are all part of a campaign to establish Chia as more reputable than the rest of the blockchain industry. “It’s important to us to be seen by the marketplace as a real investment and not just a pump and dump, hence us going for more institutional investors that aren’t trying to flip their positions as soon as they become liquid,” Cohen explains.
The cryptocurrency space has been dominated by bold claims, weak follow-through, limited utility and plenty of scams. That’s poisoned the well, souring the public and inviting government regulation. Chia has a lot to live up to. Even if the technology works, beating the network effect of other cryptocurrencies and getting enough Chia owners so it actually becomes useful will be tough. But with a solid team, set of investors and plan, Chia could prove the blockchain’s worth beyond Bitcoin.
For more on Chia, read our scoop about it coming out of stealth:
News Source = techcrunch.com
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