While the rise and fall of bitcoin’s price grabs many of the headlines about the crypto industry, a growing number of startups are using blockchain technology to build alternative financial services applications that could someday compete with the biggest banks, brokers, and insurers.
Dave Balter, chief executive of Flipside Crypto in Boston, has been keenly following those less obvious goings-on in what’s become known as decentralized finance, or DeFi.
On Tuesday, Balter’s firm announced $50 million in backing in a deal led by Republic Capital in New York and including, among others, former hedge fund manager Michael Novogratz’s Galaxy Digital, Fidelity’s Avon Ventures, and Dapper Labs, the company behind CryptoKitties and NBA Top Shot. The deal valued Flipside at $350 million, 10 times its valuation when it last raised money in 2019.
The firm was started in 2017 when Balter and some cofounders were working hard by day to build a startup that would help with online obituaries. At night, they were dabbling in investing in crypto projects and eventually realized that crypto was the bigger opportunity.
“It just took off on us,” Balter said. “It was hard not to get pulled into it. We went, as they say, way down the rabbit hole.”
The challenge in the DeFi industry is to make sense of the thousands of startups known as decentralized autonomous organizations, or DAOs, that are being built on top of blockchain platforms like the popular Ethereum blockchain or the one created by Algorand in Boston.
It’s still early days, but DAOs are essentially a new way for people to back startup projects in crypto land. A DAO can have any sort of business, from offering loans or speeding real estate transactions to bidding on a copy of the US Constitution. Each DAO issues its own digital tokens that both help enable transactions and allow token holders to vote on the organization’s rules and procedures. (The DAO tokens are quite different from non fungible tokens, the crypto tokens used for trading digital artworks and other collectible items.)
If a DAO’s application takes off, the tokens can become quite valuable but figuring out which DAOs will succeed or fail can be hard to discern. Tokens from a hyped project that doesn’t pan out could become worthless, and tokens from a poorly designed project could be lost or stolen.
Currently, the value of all token assets at the nearly 5,000 DAOs tracked by data analytics site DeepDAO is close to $11 billion, although it’s a top-heavy distribution — only 90 organizations issued tokens worth at least $1 million. The most valuable stash of tokens, $2.2 billion worth, was created by Uniswap, a DAO which facilitates cryptocurrency trading using the Ethereum blockchain. Meanwhile, thousands of projects at the bottom of the rankings have nothing yet.
Flipside’s analytics business tries to help programmers, investors, and others figure out which DAOs are on the rise and thus worth investing their time and money.
Initially, the firm tried creating and selling in-house data analytics. But keeping up with the reams of transactions on every chain proved difficult. Instead, Balter turned to a crowdsourcing model that works a bit like the way software companies pay “bug bounties” to people who find security holes in apps.
Blockchains like Algorand are willing to offer bounties in return for publicly available analysis of DAOs created on their chains. Flipside organizes all of the many bounty offers on its site, attracting people interested in doing the analysis. Then the firm pays part of the bounties to people who do the analysis and keeps a portion for itself. Last month, more than 19,000 people participated in 30,000 Flipside projects, and the firm has paid out $2 million over the past year in bounties.
Balter likes to use a physics analogy to explain the kind of insights that crowdsourced analysis reveals.
Lots of DAOs and startups have raised financial backing but those dollars only represent “potential energy,” Balter said. Flipside is more interested in finding projects that are already attracting real-life users and developers for their apps and services — an early sign they will flourish. He calls that “kinetic energy.” It’s the difference between a boulder poised at the top of a hill and one that’s already picking up speed as it rolls down the hill.
Some companies’ projects appear to have a lot of activity, but the transactions are actually back-and-forth trading by the company itself or programmed bots. That’s not real “kinetic energy” to Balter. The goal of Flipside’s analysis is to ferret that out as a public warning to investors and programmers to stay away.
“We saw this one chain that was literally passing money back and forth between their own apps,” Balter said. “And everyone’s like, ‘Oh, my God, they’re growing. Look at all these transactions.’ We’re like, you’re not doing anything.”