It was a statement repeated often throughout Token2049.
“Bear markets have historically been good for innovation.”
Norwegian Alex Svanevik and his team began building Nansen Pte Ltd in 2019 at the tail end of the last bear market. Backed by recognized names such as a16z, the crypto wing of U.S. investment giant Andreessen Horowitz, the blockchain analytics platform raised US$75 million in investment funding in 2021 and is now recognized as one of the primary analytics tools in the crypto industry.
But like the rest of that industry, Nansen has felt the effects of the current crypto bear market. That downturn began with the collapse of the Terra blockchain in May 2022 and accelerated with the meltdown of cryptocurrency exchange FTX in November, with over US$2 trillion wiped off the market in that time.
Nansen indexes what Svanevik calls “the most extensive database of wallet labels” available, allowing users to see which crypto wallets are making what transactions when and via which mode of exchange. Investors could see outflows from FTX as it collapsed and Svanevik said the ties the platform has generated with exchanges since then could help protect investors from another damaging failure in the industry.
At Token2049, in the midst of the bear market, Nansen announced an upgrade to its service — Nansen 2. Forkast’s Will Fee asked Svanevik about the platform’s upgrade, its use of artificial intelligence (AI) and the emergence of Asia as a major growth market during a period of crypto winter.
This interview has been edited for clarity and length.
Will Fee: Promotional material for Nansen 2 leans heavily into its integration of artificial intelligence. What role does AI now play in the service?
Alex Svanevik: AI has always been part of our DNA in terms of how we ingest the data, parse it, structure it and so on. My own academic background is in AI as well. So even in Nansen 1, we had AI powered NFT (non-fungible token) price estimates. But in Nansen 2, we’re making more explicit use of AI in the user experience. You can now use the search bar to write sentences in natural language. You can write ‘Who are the top holders of Lido?’ or ‘Why is Ethereum gas price so high?’ and that gets interpreted by an AI system which then routes you to the right part of the product.
Another example is, instead of you having to configure your alerts through many different steps when getting set up, we’re going to simplify the user experience so that you can just write in, ‘I want to get a notification any time someone sells Pudgy Penguins’ or ‘I want an alert any time someone buys a large chunk of this token’ and we’ll translate that into rules for you. Then you’ll get notifications through Telegram, Discord, Slack. So I think AI is coming more to the forefront of the user experience.
Fee: Venture capital funding was down 49% year-on-year across the board for the second quarter of 2023. One of the only sectors showing signs of life is AI, with blockchain hit particularly hard. Is incorporation of AI now a necessity to keep the funding coming?
Svanevik: We’re in the fortunate situation that we don’t have to raise [capital] for a while, so we’re definitely not bringing in AI just to do a series C round at a higher valuation. For us, it’s about the recent advances that have been made in AI. Many of the things that we’re exploring now in terms of natural language processing and so on, really weren’t possible even a few years ago. There’s a lot of stuff you can do now much more easily with generative pretrained transformers (GPT) — large language models — in particular.
So where you might have had to spend a really large amount of resources in terms of engineers, data scientists, machine learning engineers to create certain features, now you can implement those features in a much shorter time. That’s why many companies are focusing more on AI. Of course there’s an element of hype to the venture interest in AI versus crypto. But primarily that’s because you can actually implement features now that were very hard to build just a few years ago.
Fee: On the subject of funding, Nansen laid off 30% of staff in May. You cited “brutal” market conditions at the time. What has changed since then?
Svanevik: That’s still true. We hired too fast. We anticipated that we would get a bear market. We did not anticipate that it would be as bad as FTX collapsing, Terra collapsing and so on. So it was important for us to right-size the company and get more focused. What we’ve changed is we were doing quite a number of things on the product side. We had a product called Nansen Connect to allow you to message other wallets. That’s something we put on hold. So we have a more consolidated focus now. Going forward we’ll have to see how markets develop. But we’re basically set up in a much better way now than we were a while back.
Fee: How damaging is a continuation of the current bear market for the wider crypto industry?
Then on the institutional side, there are some interesting projects coming up now that focus on real world assets, more things like tokenized T-bills, which is very promising. Then of course, the foundation for institutional interest is proper regulation. Many institutional players will simply not participate without regulatory clarity, which is a big issue in the U.S. of course. But you have to chip away at these problems. When we look towards next year with some of these product innovations, combined with more regulatory clarity, we have a pretty good set up to make a comeback as an industry.
Fee: Given the regulatory scrutiny in the U.S., there’s a narrative that the crypto industry will now migrate eastward toward Asia. As a crypto business founder based in Singapore, do you feel that to be true?
Svanevik: I think it is true. Anecdotally, I’ve met with leaders at the top U.S.-based exchanges who are looking to at least diversify into other countries. And Asia is definitely one of the most promising, if not the most promising region in the world, both because we have the largest population and because there’s a lot of crypto interest generally. That’s particularly the case in Southeast Asia but more broadly in Asia too.
The three main destinations that people talk a lot about are Singapore — where we’re fortunate to have really strong regulators who are very competent when it comes to blockchain — Dubai and Hong Kong. All three have quite different strategies when it comes to how they approach the crypto industry. But Korea and Japan are potentially massive markets and they are already massive markets for many exchanges. So I think it’s wise for people to look toward Asia.
Fee: The FTX collapse and subsequent fallout has eroded trust in the crypto industry. What role can Nansen and other blockchain analytics firms play in preventing the next FTX?
Svanevik: It’s funny because we are not typically focused on regulatory matters. Our focus is more on helping investors find the next token that’s going to do well, or the next NFT, and performing due diligence on them. But then when FTX happened, we found ourselves in a situation where we can actually help bring a lot of transparency to the space. On the back of FTX, we worked with most of the world’s big exchanges to create more transparency around their reserves specifically, which we now track.
We were already tracking exchanges as part of our own investigative efforts. But now we have established direct relationships with exchanges who share the wallets where they keep most of their assets. That allows us to give transparency to the whole community on how much reserves the exchanges have. Of course, we don’t have the liability side, which is very important, so we don’t get a complete solvency picture. But I think Nansen and other analytics providers can be very, very helpful to create more transparency for everyone.
This, frankly, is one of the main benefits of blockchain versus traditional finance, right? We can actually create transparency because the technology natively works the way it does. So I think this is super exciting for us to be able to help on that front, which isn’t a commercial offering by the way. We don’t charge exchanges to help them in this way. But we figured it’s good for us to get more exposure. It’s good for the exchanges to be able to create more trust. Then of course it’s good for users who can make a more informed decision on whether they want to keep money on an exchange or not.
Fee: You mentioned transparency as a selling point for blockchain. As an analytics firm, how does Nansen address the queasy balancing act between blockchain transparency on the one hand and the often highly ideological desire for privacy on the other?
Svanevik: I wouldn’t claim that I have a perfect solution for this. But I think you have to accept that you cannot have 100% transparency and 100% privacy at the same time. So it becomes a question of trade offs. And what I’ve seen over the years is that many of the full privacy chains or protocols don’t get as much adoption as you might expect. Services like Monero or even Tornado Cash have had relatively little traction if you compare them to other blockchains like Ethereum or Bitcoin. So there is one question about general product market fit for privacy solutions.
At the same time, privacy is obviously super important and many people care a lot about it. So it seems like if you want blockchains to fundamentally be the future of finance and displace, say, banks and so on, you need to have products and offerings that preserve the privacy of individuals when they make transactions. Probably something where regulators are comfortable with some degree of privacy might be the way to go.
If you can create something, whether it’s a layer-2 solution, a protocol or a separate channel that has certain limits on spend on different addresses, for example, maybe that’s one way to make this happen. I think regulators will be less comfortable with fully private transactions in the order of hundreds of millions of dollars. But they might be more comfortable with smaller transactions that private individuals make day to day. Then there’s a spectrum of how much tolerance we want to give to large transactions and so on, which becomes, to some extent, an ideological question and maybe even a political question. It’s something we have to figure out over the next few years.
There are so many benefits of transparency. But if you want privacy, you have to accept the need to eliminate some of that transparency and to strike the right balance. I think there is no one solution that will work for businesses and individuals and regulators and so on. You’ll probably need to find separate solutions for separate use cases.