Pantera’s Lauren Stephanian: Investing in ‘Crypto Building Blocks’ to Thrive in A Bear Market

ABSTRACT

KEY POINTS FROM LAUREN STEPHANIAN'S POV

What are the tailwinds for growth in this category?

• Despite the recent downturn in crypto, enterprise interest in the space has not abated. “We’ve definitely seen the market expand for enterprises interested in crypto since the beginning of the year,” Stephanian says. “A lot of enterprises are launching new initiatives in crypto, and any enterprise that wants to hold crypto on their balance sheet or launch an NFT side to their business is going to need specific tooling for that, like accounting or analytics tools.”
• Despite a decade of boom-bust cycles, the underlying market for crypto infrastructure has grown into a stable, mature space. “A lot of tooling is still needed,” Stephanian says, “and the market size is now big enough that a lot of these companies are doing well. Even in this down market, the infrastructure companies are the ones that are pulling in revenue.”

What are some examples of use cases and applications for these specialized tools?

• There are a lot of technical specificities in crypto, leading to a thriving market in crypto-focused developer tools. While some web-tuned tooling works fine in crypto, Stephanian sees crypto-specific developer tooling as a huge market opportunity. There are coding languages that are used in crypto that aren’t widely used elsewhere. She cites Solidity as one prominent example.
• Vulnerabilities in crypto can have perilous consequences, so there are opportunities in the security space. “When an engineer publishes a smart contract,” Stephanian, herself an engineer, notes, “if there’s a vulnerability there and people put money into the contract, the engineer could be held liable reputationally, for those bugs. It’s a scary concept, especially when the code is immutable (though people have gotten around this using proxy contracts), so people are coming up with tools to scan for vulnerabilities to remind you, for example, that you should write your code this way and not that way.”
• The ever-shifting regulatory environment of crypto creates an acute need for dedicated accounting tools. “You need to keep track of millions of transactions that might be flagged in your system,” Stephanian explains. “And you might have to track the cost-basis when you’re transferring one token to another. Even though you’re not touching the dollar, it’s still a taxable event and you need to keep a record of it. It’s difficult to do if you don’t have native financial accounting tooling in place.”

• A few specific companies are emblematic of potential business models and illustrate uses cases in the crypto tooling space:
  • Definitive is an analytics suite for crypto marketing teams
  • Bitwave offers usable enterprise accounting tools for any web3 or web2 business transacting in crypto
  • Piñata offers tooling that makes it easier for crypto businesses to store and distribute media in web3

What are some of the potential roadblocks?

• “We are in a bear market,” Stephanian says, “so the biggest risk is that many businesses are looking to reduce headcount and expenditures on vendors. However, I’m still seeing quite a bit of capital allocated towards tools and infrastructure that are able to show a meaningful impact.”

IN THE INVESTOR’S OWN WORDS

Crypto has been around for over a decade and we’ve now started to see businesses in this space mature. There are companies transacting billions upon billions in dollar volume and attracting the interest of both retail users and enterprises alike.

When tracking key metrics such as volume, revenue, and engagement, these businesses are finding that adequate tooling is a necessity for continued success in achieving the KPIs they set for themselves. This is true across a number of functions: keeping on top of their company’s finances, their user metrics, reducing exposure to technical vulnerabilities, etcetera.

More broadly, it’s hard to say how things will play out in crypto, but in order to get the widest amount of people using crypto you’re going to need to strip all the complexity away for the end user, including business users. And so we’re seeing things like bridges being built to enable interoperability between different chains and ultimately applications can be built on top of those bridges and the different technical layers. In an ideal world, the end user might not even know that they are using crypto. They just need to integrate a wallet and it all works behind the scenes.

That’s the ideal vision I have for crypto. I think we’re beginning to see where the chips are going to fall, but as we’ve seen, things can change so quickly in this space.

MORE Q&A  

Q: When you look at the landscape of crypto-specific tooling, are these tools themselves built to be decentralized through blockchain tech?
A: "We do see some tools that are partially decentralized and partially centralized. Typically, a lot of the picks and shovels are centralized entities and they help founders reach the goal of building something decentralized, but they don’t have to be one or the other."

Q: Are companies offering support in numerous Web3 languages and environments, or are they typically concentrated on one?
A: "For security tools, we’re seeing people, especially more early-stage companies, focus and start off on one chain. There are so many nuances when it comes to different layer ones that it takes a lot of time and talent to do well with one chain. But most companies plan to eventually expand and service other chains. You see that even with the audit companies in this space; oftentimes, it depends on the nature of the talent you’ve got at your specific company."

WHAT ELSE TO WATCH FOR

• Watch for the data and analytics space to heat up: Stephanian divides the crypto-specific data space into three buckets: there are compliance and tax tools for governments and larger institutions; data for trading and financial institutions, which she sees as ultimately being a slightly smaller market; and tools that are analogous to Google Analytics or Mixpanel, but for crypto builders. The latter, she believes, is a major growth opportunity.
• Look for opportunities in low- and no-code tools in crypto. In keeping with the theme of making complexity invisible to the end user, Stephanian expects to see the low-code and no-code paradigm extend into crypto.

STARTUPS MENTIONED IN THIS BRIEF

• Definitive: an analytics suite for crypto marketing teams
• Bitwave: usable enterprise accounting tools for any web3 or web2 business transacting in crypto
• Piñata: tooling that makes it easier for crypto businesses to store and distribute media in web3
• Chaos Labs: protocol security and scenario simulations for engineers
• Mixpanel: an analytics platform that helps product, marketing, and growth teams to measure and optimize user experiences