White Star Capital Digital Assets Fund - Newsletter #150
Lessons from Fiat Part 2: The Crypto Payments Industry and the Race to Volume
Lessons from Fiat Part 2: The Crypto Payments Industry and the Race to Volume
White Star Capital Digital Asset Fund - newsletter #150
Last week, I looked at how the payments industry — both in fiat and in crypto — is comprised of fees on payment volume. Crypto start-ups looking to disrupt the industry by offering lower fees to merchants than extractive incumbents will need to find ways to secure enough volume to negotiate their rates down or bypass existing component players in the stack entirely.
Now, because transaction volume is the main chip that merchants and payments businesses use to negotiate for lower fees, they often face a Catch-22:
Most customers choose the lowest fees; the lowest fees are ensured by the most customers.
Crypto companies have the hindsight of two key lessons from the fiat payments industry that can be applied to drive greater volume. This week, lets look at how blockchain technology offers unique go-to-market strategies to help solve for this dilemma.
Part 2: Go-to-Market: Improving Customer Acquisition and Engagement
To break the catch-22, start-ups need to find a way to secure initial volume when fees are at their highest. Fortunately, in the payments space, there are a myriad of tangential offerings which can hook a merchant and help them swallow the fees.
For payments service providers:
Customer insights: On-chain data can be leveraged to better understand a customer and their other spending and financial behaviour, which is useful feedback both in aggregate and individually in real-time for product, data, and marketing teams. This could come with an associated analytical engine and dashboard, particularly if wallets began to include verifiable credentials and social data that enable them to better understand consumption patterns. Oamo (WSC portfolio company), for example, is an opt-in consumer data marketplace which could power this. On the other hand, access to a wallet’s previous activity could improve a KYC provider’s ability to assess the fraudulent or illicit nature of a customer and reduce the $117bn yearly costs of chargebacks without introducing additional friction or losses for the user. We’re seeing increasing numbers of players offering transaction monitoring and risk assessment solutions, and the best of these ingest both on-chain and off-chain data. VaaS, for example, is a Brazilian risk assessment solution for Brazilian fintechs, combining data from the Pix payment network, blockchain transactions, and local data bureaus like credit-scoring bodies to get the most holistic and real-time view of customer profiles for institutions providing financial products.
Customer engagement: Relatedly, crypto payments businesses that catch the consumer at point of sale can also offer improved customer engagement and loyalty programs. Being able to prove loyalty and early adoption could feed into a membership and rewards scheme, like the SaaS solutions built out by TYB and Kalder. Because it can be up to 25x more expensive to acquire a new customer than to keep an existing one, and because consumers spend more on brands to which they are loyal, a 5% increase in customer retention can correlate with up to 25% profit increases. This strategy is most effective for smaller D2C brands who rely on branding and customer loyalty. Companies experimenting with this tend to be exploring one of two models: a mutable NFT tracking user activity that enables exclusive access to other products, or tokenised rewards airdropped to the most loyal customers. Consider this the hyper tech-enabled version of Amex’s air miles.
Credit decisioning: For any merchant wishing to experiment with point-of-sale credit, the added insights of a consumer’s on-chain activity could add colour to their assessment of fraud and credit-worthiness. This is most exciting for the 1.7bn unbanked population who cannot access traditional lending institutions or build a credit file. DeLend, for example, is looking to build a Maple Finance (an on-chain institutional capital marketplace) but for buy-now-pay-later for Latin American retail merchants. Not only is this a novel approach to sourcing the credit supply, but it also can feed on-chain data into its credit-scoring engine to make the customer profile more comprehensive.
These standalone verticals are all competitive and hard to differentiate. As a start-up dedicated to one of these, the individual offering needs to provably result in an active increase in revenue (whether that’s through increasing the customer pool size, basket value, retention, or conversion rates) or decrease in cost (whether that’s through tax optimisation, or native reward schemes cheaper than monetary discounts). In reality, the difference is usually marginal if not nought, often leaving these products as a ‘nice to have’ rather than a stickier and higher ACV ‘must-have’. As a payment service provider, however, a start-up can integrate some of these associated perks to convince merchants to on-board, and either absorb the cost internally or use it to tier pricing models for the core payment rails products.
For card issuers:
On-ramping to upsell: Since card issuers are customer-facing, the additional perks to consumers will have to come in the form of an in-app experience. This could either be a standalone wallet or an SDK for existing wallets, from which users could onboard with educational content before on-ramping or experimenting with new crypto products. We’re seeing start-ups like Relay experiment with AI for this onboarding piece, enabled by the open-source nature of crypto and publicly available Github depositories and white papers that AI bots can distil for users. The possible future extension of this is AI agents trading customer crypto funds sitting in wallets, particularly as this is synergistic with the market makers and DEX/CEXs responsible for the crypto exchange in the backend. Binance Card, for example, has an ideal go-to-market as customers already have a wallet, through which they can buy and trade more crypto, which they can directly spend without manually moving funds.
Personalised benefits and rewards. The rewards schemes described above also of course benefit consumers, particularly when the cards are intended for use in products where consumers already have a relationship with the brand and want exclusive/early access to products or events offered by that brand. See Starbucks’ blockchain-based loyalty scheme, for example.
Consumers are not as price sensitive as merchants are when it comes to paying in crypto, as seen in the extortionate land of on-ramp providers. Merchants are securing recurring contracts and so will methodically assess competing options; consumer decisioning is far less considered. Whilst cashback and points systems have largely played out and are not meaningfully differentiating, go-to-markets can be more creative so long as the outcome is improved UX/UI and end-product engagement.
Next week, for the final part of this story, I’ll be taking a look at the next stage for upstart payments business- how to build a moat around this initial volume.
🔦 White Star & Portfolio Spotlight
How White Star’s new portfolio company will revolutionize healthcare data transfer and security
Rymedi is a web3 healthcare information platform that utilizes blockchain technology to simplify the transfer of medical records and data. With the funding from White Star, Rymedi intends to enhance data security, improve accessibility to healthcare records, and expand in the North American market while also exploring global opportunities. Their decentralized data platform aims to tackle healthcare obstacles, automate data compliance, and offer streamlined workflows for healthcare enterprises.
Cometh Connect simplifies gas fees and onboarding in Web3
Cometh Connect is a biometric smart wallet service built on Layer 2 technology that addresses the challenges of gas fees on the Ethereum network. It simplifies the user experience in Web3 by allowing decentralized applications to cover transaction fees, making gas fees invisible to users, and streamlining onboarding for newcomers to the decentralized web.
Earn rewards with Oamo's Data Pools and high APY
Oamo is offering Data Pools with attractive incentives for different user categories. Yield seekers can earn up to $10 USDC through a high annual percentage yield (APY) on stablecoin deposits. Furthermore, DEX traders, DeFi enthusiasts, and WBTC holders can also receive rewards from Primex, Zapper, and Ledger, respectively.
Ledn introduces a new BTC collateral redemption option
Ledn now provides an additional option for borrowers with loan-to-value (LTV) ratios below 40%. They have the ability to "redeem" a portion of their BTC collateral into their Ledn BTC Transaction Account, which will restore their LTV to 50%. Borrowers can easily monitor the progress of their loan by accessing their Ledn account.
ParaSwap introduces APR for staking PSP tokens
ParaSwap has announced the introduction of APR (Annual Percentage Rate) for staking PSP tokens in Basic and Boosted Pools. They provide historical and ongoing epoch APR data, along with calculations, mentioning that the individual APR can vary based on the ParaBoost Score and ParaBoost Share.
Automated Ethereum exposure through Index Coop's CoinDesk ETH Trend Index
The "Index Coop CoinDesk ETH Trend Index," also known as cdETI, is a product created to offer automated exposure to Ethereum (ETH). CdETI is an ERC20 token that can be created or redeemed on the Ethereum mainnet. The goal is to make cdETI accessible on rhino.fi for distribution across Layer 2 networks and other blockchain platforms in the near future.
Eyeball's fight against cheating in online gaming
Eyeball addresses the issue of cheating in online games by recognizing the proactive steps taken to combat cheating in their mobile game. It emphasizes the fact that cheating is a prevalent concern in online gaming. Players frequently employ tactics like using VPNs to protect themselves against different cheating methods, including wall-hacks, aimbots, and lag-switching.
🏦 Enterprises & Institutions
Fidelity ‘actively exploring’ how to access European crypto market after MiCA goes live
Fidelity Digital Assets is actively considering entering the European cryptocurrency market after the implementation of the Markets in Crypto-Assets Law (MiCA) in 2024. According to Manuel Nordeste, Vice President of Fidelity Digital Assets, MiCA provides a well-regulated framework for institutional investment in cryptocurrencies like Bitcoin and Ethereum, making it a positive development for the industry.
BlackRock’s Bitcoin ETF briefly pulled from DTCC website for ‘additional research’ because of market frenzy
BlackRock's iShares Bitcoin Trust ETF experienced a temporary removal and subsequent re-addition from the DTCC's website, causing disruption in cryptocurrency markets. The intentional delisting aimed to conduct additional research due to the significant attention it garnered. Details about the nature of the study, its implications, and whether it was initiated by the SEC, another agency, or an internal decision at the clearinghouse remain unclear.
Vodafone and Chainlink demonstrated blockchain's value in streamlining global trade
Vodafone's Digital Asset Broker (DAB) has shown that blockchain can enhance global trade processes. In collaboration with Chainlink Labs, Sumitomo Corporation, and InnoWave, they conducted a successful proof of concept where devices autonomously provided information for trade document exchange, addressing challenges in the $32 trillion global trade ecosystem. This was achieved using Chainlink's cross-chain interoperability protocol (CCIP) to ensure security and interoperability.
Mastercard teams up with MoonPay for Web3 push
Mastercard has partnered with MoonPay, a cryptocurrency and NFT payments app, to explore Web3's potential for consumer engagement and loyalty. MoonPay will leverage Mastercard's Crypto Credential system for trusted transactions and integrate payment technologies like Mastercard Send and Click to Pay, with MoonPay's subsidiary, Otherlife, contributing to Web3 creative agency services and strategy development.
Deutsche Bank and SC Ventures complete first stablecoin swaps on UDPN
Deutsche Bank and SC Ventures completed the inaugural stablecoin swaps on the Universal Digital Payments Network (UDPN), marking a milestone in the advancement of stablecoins, CBDCs, and digital foreign exchange infrastructure. The UDPN aims to foster interoperability between regulated stablecoins and central bank digital currencies, serving as a bridge between digital currencies, commercial banks, and e-commerce platforms.
⚖️ Government & Regulation
Is Bitcoin a hedge in an unstable economic and geopolitical landscape?
Bitcoin's recent surge, despite false reports about spot ETF approvals, can be attributed to factors like its constrained supply, increased demand as a safe haven asset in uncertain markets, and rising geopolitical tensions. Furthermore, events such as banking crises in the US and China have historically led people to see Bitcoin as a "flight to quality," which further enhances its attractiveness as a hedge in a dynamic economic and geopolitical environment.
EU may tap blockchain to overhaul bureaucracy throughout 27-nation bloc
The European Commission is considering the adoption of blockchain and other emerging technologies to modernize bureaucratic processes throughout the 27-member European Union. Starting in early 2024, the Commission intends to encourage the utilization of these technologies to improve administrative efficiency and tackle challenges like the Covid-19 pandemic. This initiative is supported by a budget of €11.2 billion allocated for digital services and the digitalization of public administration.
Bank of Spain advocates for digital euro, citing benefits for digital payments and privacy
Spain's central bank, Banco de España, has outlined the potential benefits of a digital euro, emphasizing its role in advancing digital payments and offering offline privacy similar to physical cash. The bank's statement also highlights that users' data would remain visible only to their financial institutions and not the central bank infrastructure provider, Eurosystem, in the online form of the digital euro, which is currently in the "preparation phase" until 2025.
Why adoption of stablecoins and Bitcoin have surged 9% in Nigeria during bear market
Despite the ongoing crypto bear market, Nigeria has seen a 9% increase in the adoption of stablecoins and Bitcoin over the last two years. This growth is driven by the devaluation of the Naira, Nigeria's fiat currency, which has lost 65% of its value against the US dollar since June when the Central Bank of Nigeria decided to float the currency. To preserve their wealth and facilitate transactions, Nigerians are increasingly turning to stablecoins and Bitcoin, with Binance being a prominent platform providing access to these cryptocurrencies.
Digital yuan used to settle crude oil trade for Chinese oil company
PetroChina, a Chinese oil and gas company, reportedly settled a trade using the digital yuan, marking a significant development in the use of China's central bank digital currency (CBDC) for commercial transactions. This move highlights China's ongoing efforts to promote and expand the use of the digital yuan in various economic sectors, including international trade.
💰 Funding & Exits
Israeli web3 security startup Blockaid secures $33M in funding from Sequoia and others
Blockaid, a web3 security startup, has secured $33 million in funding from investors such as Sequoia Capital, Greylock Partners, Cyberstarts, Ribbit Capital, and Variant. Blockaid was created by Ido Ben-Natan and Raz Niv, both of whom served in Unit 8200, the cyber intelligence unit of the Israeli military, as well as the Office of the Prime Minister of Israel. The company offers web3 security tools to prevent crypto fraud, phishing, and hacks, and has already scanned over 450 million transactions, protecting billions of dollars' worth of assets.
DEX SynFutures secures $22M in Series B funding for AMM Oyster launch
SynFutures, a decentralized crypto derivatives exchange, raised $22 million in a Series B funding round led by Pantera Capital and joined by HashKey Capital and SIG DT Investments. They are launching their automated market maker (AMM) called Oyster, simplifying crypto asset trading through algorithmic robots. SynFutures targets high-net-worth individuals and small institutions, aiming to address DeFi's capital efficiency challenges by integrating on-chain orderbook features from traditional finance.
'Shrapnel' game studio Neon Machine raises $20M led by Polychain
Seattle's Neon Machine game studio has raised $20 million in Series A funding, led by Polychain Capital, to further develop its upcoming first-person shooter, Shrapnel. The funds will support the game's early-access release in December 2023 and its full launch in 2024. Shrapnel, built around NFTs on Avalanche's private crypto network, offers in-game content as NFTs and prioritizes user-generated content that can be minted as NFTs, aiming to revolutionize gaming with blockchain technology.
smlXL raises $13.4M in Seed funding led by a16z to enhance blockchain infrastructure
Blockchain infrastructure startup smlXL has raised $13.4 million in seed funding, led by a16z, with participation from Grelock and others. smlXL's goal is to enhance blockchain transparency and accessibility through tools like the Instrumented Ethereum Virtual Machine (iEVM), which enables cost-efficient off-chain computations, along with products like evm.codes and evm.storage for blockchain analysis.
Web3 healthcare information platform Rymedi has raised $9M in Series A funding led by White Star Capital
Blockchain-based healthcare data platform Rymedi has successfully raised $9 million in Series A funding. The round was co-led by RW3 Ventures and White Star Capital, with additional participation from Blockchange Ventures, Avalanche's Blizzard Fund, and angel investors. With this Series A funding, Rymedi's total funding reaches $13 million, and two of its strategic leads will join Rymedi's Board.
Bain Capital Crypto and Polychain lead $6M funding round for privacy protocol firm Nocturne Labs
Nocturne Labs, the company behind the privacy on-chain accounts protocol Nocturne, has successfully raised $6 million in a seed funding round. The funding round was co-led by Bain Capital Crypto and Polychain Capital, with participation from notable investors such as Vitalik Buterin, co-founder of Ethereum, as well as Bankless Ventures, HackVC, and Robot Ventures. The protocol will offer private accounts on public blockchains, leveraging technologies such as zero-knowledge proofs and stealth addresses.
🚀 Project Launches & Updates
World Bank rolls out first digital bond issuance on Euroclear
The World Bank has raised €100 million through a three-year digital bond on Euroclear's Digital Securities platform to support sustainable development projects. The bond was issued using Corda, a permissioned blockchain, and exemplifies the rise of asset tokenization, improving liquidity, democratizing investment, and reducing transaction costs.
Bitfinex Securities announces tokenized bond
Bitfinex Securities is set to list its first tokenized bond, ALT2611, in November. This 36-month, 10% coupon bond, denominated in Tether (USDT) and issued by Mikro Kapital, covers risks related to microfinance organizations, small financial institutions, and banks in various nations, including those along the Silk Road. Bitfinex's CTO, Paolo Ardoino, views this as a new era for capital raising through liquid markets and stock/fund markets, with Bitfinex Securities assisting issuers in listing their tokenized securities on public exchanges.
Maison Margiela launches "Numbers": A blockchain-based minting game
Maison Margiela has launched a blockchain-based minting game called "Numbers," where participants collect token-linked digits from 0 to 23 to progress in the game, with rarer numbers being more valuable. This gamified Web3 experience aims to build Maison Margiela's future Web3 community and uses the symbolism of the brand's numbering system found on its physical collections.
How artists are fighting AI exploitation with data poisoning
Artists are using a tool called Nightshade to protect their work from being used without permission by generative AI models. Nightshade employs "data poisoning attacks" to corrupt the data used to train AI models, specifically targeting individual prompts to disable the AI's ability to generate certain content, serving as a deterrent against intellectual property theft and deepfake creation.
🔥 Other Bits We're Excited About
To gauge impact of bitcoin spot ETF, analysts look to gold
Industry experts are drawing parallels between the potential impact of Bitcoin ETFs and the influence of gold ETFs on gold prices. According to a report by Galaxy Digital, if Bitcoin ETFs were to attract $14.4 billion in inflows during their inaugural year, Bitcoin's price could surge by 74% in the subsequent 12 months. This projection is based on the assumption that Bitcoin is adopted by 10% of total assets across three wealth management channels, each with an average allocation of 1%.
Stocks are down, Bitcoin is way up
Over the past year, the correlation between Bitcoin and traditional equities, such as the Nasdaq and the S&P 500, has significantly decreased. In 2022, Bitcoin and stocks moved in tandem, but this correlation has weakened. This could be attributed to factors such as increased borrowing costs for publicly traded companies and stronger correlations between stocks and bonds.
DAOs will prevent another FTX
DAOs can prevent another FTX-like incident by creating a community-driven organizational structure where users have a say in decision-making. This structure ensures that user interests are protected, safeguards funds through transparent code, and allows for community voting to approve changes, bridging the gap between traditional and decentralized finance. Ultimately, DAOs put users in control, making exchanges more accountable and responsive to their community's needs, enhancing security and trust in the crypto space.