Counting the encrypted data service track: valuations often reach 1 billion dollars, highly favored by traditional institutions

Author: 0xHY, PANews

In the blockchain primary market where large orders frequently occur, there is a sector that cannot be ignored, which is blockchain data services. This sector has been favored by capital since the beginning of 2021, giving rise to several unicorn companies.

Data is the oil of the new era. In the world of web2, the largest companies possess the most data. If Facebook and Google know you better than you know yourself, it is not surprising. Their business models largely depend on their ability to accumulate vast amounts of data and utilize it effectively.

When it comes to investment, the story is similar. Large financial institutions rely on data to help make decisions. Whoever has the most data and the ability to analyze it can make the best investment decisions. Similarly, this information is mostly confidential, and ordinary people cannot access it.

However, blockchain data is public, transparent, and immutable. In the web3 era, data is recorded on public ledgers, and anyone can access this data, but not everyone has the ability to extract and process such large amounts of data, leading to the emergence of data service providers.

Is a billion-dollar valuation expensive?

Is it expensive for blockchain data service companies to achieve valuations of a billion dollars or even tens of billions of dollars?

If we compare it to traditional financial data companies, in 2019, Bloomberg's annual revenue reached $10 billion, and in 2020, the total amount paid for financial data globally was around $30 billion.

Currently, these blockchain data companies have not disclosed their financial status. In a financing statement from June 2021, Nansen stated that its revenue had grown more than 1,000 times, which, if the baseline for this increase was a few hundred dollars, means that Nansen's revenue at that time was approximately a few million dollars.

Unlike most data service providers that try to earn alpha returns for users, the highest-valued company in this sector, Chainalysis, primarily serves government contracts and has a larger scale. In 2020, Coindesk calculated that since Chainalysis was founded, federal agencies had spent at least $10 million on Chainalysis's tools, services, and training, based on reviewing 82 federal procurement contracts. If we include potentially deferred contracts, this could reach $14 million, and this is just for the U.S. government. However, this business model has also made Chainalysis controversial; for example, Bitcoin supporter Andreas Antonopoulos has criticized Chainalysis as "unethical" and "part of a privacy-infringing arms race."

Nevertheless, if we assume that crypto finance will eventually fully penetrate traditional finance, even at a price-to-sales ratio of 10-20 times, the valuations of these companies should be quite considerable. As cryptocurrencies are further accepted by mainstream institutions, the demand for data will only increase, which explains why so many investment institutions are rushing to enter this sector to get a piece of the pie.

Which venture capital firms favor this sector?

Compared to native investment institutions in the crypto space, many traditional investment firms are making multiple bets in this sector. For example, Coatue led the E round of Chainalysis and the B round of Dune Analytics, Tiger Global led The Graph and also participated in Nansen's latest financing round, while Accel led Nansen's round and co-invested in Chainalysis's round last June.

The blockchain data service sector is highly favored by traditional investors. Institutions like Coatue, which operate in both traditional finance and the crypto world, are noteworthy, and Tiger Global is also well-known, while Accel is even older, having been established in 1984.

This sector has also witnessed some "old money" making its debut in crypto investments: billionaire investor Steven Cohen's Point72 Venture led the A round of Messari, marking this fund's first investment in the blockchain world.

Additionally, Goldman Sachs led the B round of Coin Metrics, Prosus Venture (formerly Naspers Ventures, Tencent's largest single shareholder) led the A round of DappRadar, and Sequoia China invested in Debank. Evolution Equity, which led Elliptic, is an investment firm established in 2008 focused on cybersecurity and enterprise software, and it was joined by SoftBank's Vision Fund.

For traditional institutions, investing in data companies may be more about strategic positioning than financial returns. On-chain data serves as a "barometer" reflecting the crypto world and provides a "raw" view of the crypto landscape without filters. Investing in such companies equates to gaining core intelligence about the crypto world, helping old money to strategically position themselves in the industry.

Nansen to the left, Dune Analytics to the right

In the field of on-chain data services, the most commonly discussed platforms among ordinary users are Nansen and Dune Analytics, which represent two different business models, and there is no definitive conclusion as to which is superior.

Some believe that while Nansen can earn substantial profits in a rapidly growing crypto market due to its high customer price and continuously accumulating labels and address characteristics, the transparency of on-chain data means that as the user base grows, the asymmetrical information advantage enjoyed by paying users diminishes. Thus, Nansen's ecosystem is destined to be closed, in stark contrast to the open, user-contributed Dune Analytics, which cannot enjoy true network effects. Since the data is transparent, any product that Nansen can create, Dune Analytics can essentially replicate, such as the token god dashboard corresponding to Nansen's offerings, which Dune Analytics also has with user-contributed token god lite dashboards.

However, others argue that while Dune Analytics embodies the spirit of web3, products like this cannot be sold to institutional users. In a highly competitive market, would institutional users prefer a highly usable product or a high-threshold product that requires them to write SQL themselves? The target customers for such data services are precisely institutional users, and Dune Analytics's collaboration with infrastructure providers to offer exclusive data API services for Binance Smart Chain indicates that Dune Analytics is also moving closer to Nansen.

If data itself cannot establish a moat, maintaining a continuous stream of innovative products becomes paramount, and Nansen excels in this regard.

Taking the NFT sector as an example, Nansen has been fully engaged since the second half of 2021, continuously improving its products in line with the NFT explosion. In June, it announced the launch of NFT Paradise, NFT God Mode, NFT Wallet Profiler, and NFT Item Profiler, tracking trading volume, market cap, highest price, and floor price of well-known projects over the past 24 hours, as well as the buying and selling trends of top collectors. In July, it launched NFT Leaderboards, introducing a "profit" metric to provide investors with better investment references. In November, it launched the Smart NFT Trader dashboard, listing the top 100 addresses in terms of NFT profits and the top 100 addresses based on internal trader score metrics. In December, it announced a collaboration with Rarity to provide in-depth coverage for over 650 NFT projects.

It can be said that just from the NFT sector alone, Nansen's strong product capabilities and rapid iteration ability are the foundation for ensuring that users continue to pay high fees for its services.

The overlooked privacy issue

Although this sector is currently thriving, it is not without its criticisms, the biggest of which is: How is it reasonable for a sector that claims to return data sovereignty to individual users and should be vehemently opposed to the exploitation of user privacy in the web3 world to give rise to a group of companies seeking high profits through data analysis?

Blockchain has indeed succeeded in returning data to users. In utilizing on-chain data, whether it is governments, institutions, or individuals, everyone stands on a level playing field. Regulatory agencies and law enforcement have the ability to have full visibility into illegal transactions and track their movements, allowing them to identify criminals over time. Companies can have full visibility into transactions involving suppliers or third parties and ensure their legality. Individuals can see where "smart money" is flowing to make more informed decisions. Theoretically, the environment is fairer.

However, once this on-chain information is linked to individual user identities, such privacy breaches become permanent: which NFTs you have collected, which events you have participated in, which web2 accounts you have linked, which cryptocurrencies you have invested in and their gains and losses, and with whom you have interacted on-chain—all of this becomes clear.

If we cannot escape being tracked by big data, with targeted airdrops, pushes, and advertisements, is this really what web3 users want to see? How to provide data services while protecting privacy should be a critical issue that this sector must consider moving forward.