S3:E3 Building Crypto Infra for Institutions with Aya Kantorovich
On this episode of Archebyte we are joined by Aya Kantorovich, Co-founder and Co-CEO of Fractal, to discuss crypto’s history, what it’s like to be a founder in the industry, and the importance of building institutional grade crypto infrastructure.
As a former founding member of FalconX and current Co-CEO of Fractal Clearing, Aya deeply understands the role that institutions play in the world of crypto. She begins our conversation by highlighting exactly that before giving us a quick (but fantastic) history lesson on the crypto industry as a whole.
As Aya explains, institutions have been playing a major role in the space for several years now. They bring with them not only capital and knowledge of the traditional financial world, but needs around privacy and quality assurance that require more robust tools to be created.
While we have certainly seen some less savory companies give cefi a bad rap, Aya believes that we are beginning to see a new wave of robust, institutional grade crypto tooling that will more strongly honor crypto’s fundamentals of transparency and self custody. We close out our talk by exploring how Fractal is helping bring this vision to reality, explaining the need for disintermediation, and discussing the many hats that founders wear.
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0:49 Welcome Aya
1:23 Institutional crypto adoption
3:39 Does crypto need institutions?
5:24 Bringing crypto to the mainstream user
6:47 History of crypto infrastructure
21:40 Onboarding users
23:57 Building for institutions in a crypto-native way
26:16 Aya’s experience as a founder
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Hello everybody and welcome to Archebyte, I’m your host Katherine Wu.
Each week at Archebyte we have on the smartest voices in the crypto industry to tell us what is top of mind for them. I'm joined today by Aya Kantorovich, Co-founder of Fractal and a former founding team member of FalconX. Aya was responsible for scaling the company’s revenue through their most recent 8 billion dollar evaluation last year and has over 5 years of experience in the institutional cryptocurrency space.
Welcome to the show Aya!
I thank you so much for having me.
Let's start off today by talking about institutions and crypto as we are sitting here on the heels of a pretty traumatic, tumultuous, stressful 2022. I want to know beyond the headlines, what does institutional adoption actually look like today? And why would you know, again, sitting here in April 2023, why would a traditional asset manager or institution look to DeFi strategies or just looking into crypto at all.
Yeah, so I mean, you kind of hit the nail on the head. Last year, there was a lot going on. It was a pretty catabolic year for crypto in terms of some of the operational failures that happened within some of these CeFi or centralized finance players. And really what that caused, if you look at just onchain data, was for institutions specifically, after March 2020 was when you really saw the wave of large Bitcoin, ETH and alt coin holders enter into the ecosystem.
And then following what happened with FTX on chain data showed that it led to actually two massive things happening. The first is self-custody. So institutions moving assets off of these centralized platforms and into whether it's ledgers or custodians. And then the second piece that happened was also just massive withdrawals from exchanges, both U.S. and international, with really major concerns around counterparty risk.
The institutions that are left in crypto today realistically are not going to be your major endowments and foundations, what you saw with the excitement of institutions two years ago. But you'll likely just see the systematic programmatic hedge funds who are continuing to be in the space and crypto arms of some of these traditional players. And I think a key point there to actually notice is this shift geographically, where throughout the history of crypto you actually saw that Asia markets were driving a lot of the volume and trends up until two years ago.
Then the US market, again, institutions came in March 2020. U.S. market started to drive a lot of the liquidity events and market events, momentum driven events, and now you're actually seeing that shift happening back to Asian markets. So the pendulum is swinging. I Definitely think regulation is the biggest driver for that. But you're still seeing a lot of online data that looks pretty promising in crypto regardless.
On the flip side to that. So one of the narratives I feel like as long as I've been in crypto is institutions are coming, they're around the corner. And I definitely think that they're squarely here. But the flip side of that is, and some skeptics might ask, why does crypto need institutions? Does crypto need institutions?
Yeah, absolutely. I mean, at the end of the day, if we really want mean scale adoption, then we need institutions because institutions have the liquidity necessary for the industry to operate. And so if you look at even what's happening right now in markets, right, you had a price run up in Bitcoin, you had a price run up in Ethereum.
Both of those things happened, though, when exchanges had some of their lowest levels of liquidity in the history of those exchanges. And so it's not healthy necessarily for trading. You'll have massive volatile price movements in either direction and it doesn't lead to healthy markets. Now also on the relative on scale for adoption, institutions will have needs that just take this industry to that next step, whether it's reporting, whether it's accounting, whether it's more on the operational side that just make this industry a lot more efficient.
And so we should be welcoming them with really open arms, but especially because we want that liquidity in the space at large.
Yeah. And even taking it out of finance for a second, one of the things that I was looking at recently was, you know, what other big brands, big companies are coming in and you look at like Nike with the acquisition of Artifact and you actually, fun fact for listeners, to actually go in and look at the revenue numbers that Nike has as a result from their acquisition of Artifact, you'd be surprised.
And so that's like taking it out of just trading. This is like talking about NFTs and you're like, who buys these? Well, again, I would strongly encourage people to go read their financial statements and just look at that line item, because that will blow your mind. And then to bring it back to why is it important to go mainstream?
Like I love to give the example of my dad who did not own crypto until he was able to buy Ethereum through Fidelity.
Yeah, 100%. I mean, I think you really highlight something that's super important where specifically for NFT s that was the first use case where you had users touch crypto outside of just owning Bitcoin or Ethereum. And that was huge, right? It meant that a user didn't have to understand trading or markets or finance to feel like they were getting involved in just underlying blockchain technology.
That's really cool. You have on the artist side Refik Anadol who's had his piece in MoMA that's gotten a lot of attention. Other very large artists, you know, NFT in New York City happened last week and while it was smaller, you still had larger brand names present than in the prior year. And so to your point, it definitely feels like, you know, it's getting the attention it needs on the operational side.
People are just heads down building.
Yeah. And part of it is because I think right now we have better tooling and infrastructure than we've ever had before. And that's partially why creativity has been able to flourish within crypto and kind of like go mainstream. And so bringing it back to tooling and infra, I think it's important to talk about how far we've come in such a short amount of time.
And so I'm going to ask you to tell us essentially an oral history of the digital asset tooling landscape, infrastructure history.
Yeah, sure. So I've been in crypto for five years and even in that amount of time it's been insane to see the level of growth in the technology. It took more than five years for banking infrastructure to get built, so that's always a good context to kind of start from. It took thousands of years for some of the underlying infrastructure to get built in terms of how we think about exchange of goods and services.
So to start off with crypto specifically, it really started off with geographic specific exchanges. You had honestly tens of exchanges in Asia, Southeast Asia, South America, even the U.S., Europe, Africa and so forth, and then over time, you saw that those exchanges started to get acquired by major exchanges that kind of won the market. So you got Bitstamp Bitso in South America, you have Coinbase, obviously in the U.S. and Kraken.
You had Binance overseas. OKX Huobi. But what people don't realize was before that there were, you know, hundreds of exchanges, exchanges was the place to be at the time. Similarly, at that time, you also started to get these over-the-counter desks as well. So these are the folks who are really creating liquidity in the market for some of these larger non-retail style trades.
So you had OSL, DRW, of course, Jump, and they were the ones who were creating, whether it was liquidity on exchanges or liquidity over the counter for these different clients who again were not retail. In 2019 and into 2020 is when you started to get basically tooling to create simpler price discovery and access to credit. So all of this exchange stuff, all of this OTC stuff that was happening just spot. no credit.
This was one spot was owning and driving most of the volume in the space, no derivatives. Then you start to get the prime brokers and aggregators so think the FalconX’s of the world, as well as the Talos smart order routers like CoinRoutes. You started to also get BlockFills and then tooling around that in addition to more market makers, FTX and Alameda came in 2019 as well as Wintermute.
And so that's when you really started to get kind of this next level of liquidity providers and tooling to simplify this landscape, but kind of bridged the gap between all of these different players and all these different geographies. Take us now to 2020 and we start to hit the beautiful DeFi summer. That was a wild, wild time. And DeFi had existed long before 2020, but 2020 was really when you started to see this level of adoption with new applications coming on that made engaging in peer to peer financial transactions really easy.
And so you got what we called the DeFi blue chips, so Compound and Aave were lending platforms peer to peer, Uniswap a decentralized exchange. Then you had others like Synthetix Yearn Finance, Curve, Maker, all forms of aggregators, yield generators, exchanges, all peer to peer. So suddenly it was so easy to just log into your metamask, log to a website. And as long as you had your assets in the metamask and you were pre-funded, you could go ahead and trade peer to peer.
So that was 2020 to put into context the numbers around that, because I think that's really important, you went from 700 million in locked DeFismart contracts or total value locked before DeFi summer, to over 15 billion. So I mean, it just exploded and at that time you started to get on the capital allocators side bonds who were raising on the back of this, significant amounts of money leading into more of the operators as well too.
So that kind of leads us to the end of 2020. From there, I think this is where it gets really interesting because this kind of start continues a rollercoaster ride. We're now in 2021 and this is where you started to see Stablecoin adoption. And so historically USDT, tether, was really the main stablecoin that people were using to trade.
There was some volatility. You did have like FX traders who would come and trade tether when it dipped below one and over one. And now this is when you started to get Circle’s USDC in the market as well too. And then also confidence around USDC. You started to see more and more users use USDC in that market cap growth too.
And so Stablecoin supply increased 123 billion in just total stablecoins that were minted from 2020 to 2021. So I mean, these numbers are just enormous and people were using these stablecoins not just for obviously, you know, moving assets into crypto and then trading, but also for remittances. That's really when you started to see the whole use case of cheaply moving Internet money instantly without you're like five plus percent Western Union fees using cryptocurrency and blockchain.
And so the stablecoin adoption, you're continuing to see that. I mean, that's just been immense. And so you had over 3 million DeFi users. TVL was up again, an additional 150 billion since 2020. So that gets us to the end kind of around 2021. And this is when everyone said, okay, hold up, wait. Ethereum's really expensive to operate on.
Gas Fees back then were enormous. I mean, you would spend 150 bucks plus to, you know, trade $10 because, you know, the blockchain was so backed up, gas fees were so high. Now, when I think about Arbitrum and all of these layer twos, we've come so far in such a short amount of time, it's insane. So you started to get..
It feels like a fever dream, by the way, when I think about it.
I remember paying like what it was, it was like $250 or $300. And I didn’t even think about it, I was just like, yeah, sure, this is the norm. I think about it now. I'm like, that was literally like my brain was broken. That was a fever dream.
Right, right. And at the time I get it right. Like institutions were like, how can you claim the blockchain's better? But I'm not paying 200 bucks to submit this transaction. There's no way. It also made crypto really unaffordable right to the people that I think the industry was trying to build for. So you started to get your layer ones your layer twos that's really when conversations around Solana happened Avalanche, Cosmos you started to get the rollups, ZK sinks Arbitrum, Optimism, cross bridge developments all of that happened.
I mean, just to take a pause, that kind of technology is very, very difficult to build. To imagine that we've come from, you know, $200 in transaction fees to cents on the dollar in a year and a half is just simply unheard of. And so I think, like, you know, crypto gets a lot of bad press, but really taking a step back to think that we may truly have some of the best engineers working on these problems to solve something that fast is simply incredible, really incredible.
And then to your point about NFTs, now that we've made things cheaper and we've kind of brought the entry point lower and accessibility, this is where you start to get NFTs that really, really blossom and so you had Axie Infinity and play to earn really pop up, you started to get these big brand names so NBA Topshot, Bored Apes, Cryptopunks, Beeple's NFT sold for $69 million and we started to get, you know, very large art houses like Christie's, Sotheby's involved they all have now digital asset departments just focused on NFTs. Again, we talked about this but that was the first entry point for people who weren't touching Bitcoin and ETH, didn't need to know what that was. And we're engaging with the blockchain in a way that wasn't, you know, financial technology.
So that was just I mean, that's cool. And people forget like that was the year that Facebook changed its name from Facebook to Meta. You know, you started to get the introduction of the metaverse. And so that was a really big year for now, this new subset of what crypto and blockchain looks like and how we can use this technology in other ways as well too.
So now we're in 2020 and okay, so 2020, this is really cool. Of course I'm a nerd, so I love the stuff. But this was the year that derivative volume surpassed spot. And what does that mean? What does that mean? That's super important because it means that you suddenly got more sophistication in the market. For people options are very difficult structures to trade, more sophisticated, certain types of derivatives, swaps.
What this really highlighted was that you were getting the institutions, the traditional finance, knowledge and talent into the space to start to trade this stuff. And so huge, huge, huge. I mean, if you look at traditional finance derivatives like surpasses spot by an enormous amount. And so it really showed maturation of the space finally. And so that was great.
That happened in Jan of 2020 and then you started to see structured products emerge again. All of this to say, institutions are here. So when we think about when that was, that really started March 2020. If you look at onchain data, December 2021 was when you saw the Christmas Bitcoin rise up and then Jan was like, wow, here we are.
We're on our way to 60K, you know? And so, that was a wild time to be alive. And then, we hit what I think we hit something that was really important for the space and it was a lot of the operational issues that were really brought to the spotlight due to the industry growing as fast as it did in the five years that kind of discussed.
And so it started with Luna and Terra. Three Arrows, Blockfi, Voyager, Genesis, Celsius, and FTX was the final domino that really just blew everything out of the water. And the similarities that all of these had with one another was not that blockchain or crypto didn't operate in the way it should. In fact, when all of this happened, MakerDAO properly liquidated all of the trades on its platform.
Nothing broke in Defi, but the issues were clearly that if DeFi functions, the smart contracts work, the people don't. Right? And there are people, major people issues and operational issues that have nothing to do with the technology that clearly needs to be cleaned out. And so that is kind of where we are now. And I think with everything that happened, the biggest data point that we saw with onchain data was again that moved to self-custody and exchange withdrawals, lack of trust in these centralized players.
And so what will the future of this look like? Everything needs to be non-custodial, and that's going to be really, really important for future solutions. Transparency. You need to see people's proof of reserves. You need to see how money is segregated, if it's hypothecated. And then lastly, Tripathi Collateral Management and onchain settlements. And that's kind of what we're hoping to build.
But I think not just for Fractal, but really just the industry at large, it's going to be a must.
Yeah, well, first of all, being able to sum up the entire, you know, like that whole bit, that needs to go on a lecture, go on a book. You can write a thesis, you know, I don't know what it is, but you know when they teach this in universities one day, you know, like people better have you on as a guest lecturer.
But you paused at the perfect place because, you know, I mean, you gave us the entire history of crypto. Thank you. But now we're kind of okay. So, like, what now? Right. And like, that's what I always ask. What now? What is still missing? Like, there's so much that has been built. There are so many technological improvements. Just crazy.
I think things that should have honestly should have taken decades got solved in five years. And sure. You know, in the middle of it, I think a lot of things broke. But the fact of the matter is so much was built in such a short amount of time. So standing here now, you know, take a deep breath.
And part of it also kind of relates to and I want to talk about what Fractal is doing. You know, what made you realize you needed something like Fractal? Why I needed to exist. Like where are those critical pieces and how does Fractal fit into that?
Sure. Yeah. So Fractal is an infrastructure provider that allows institutions to clear, settle and manage their collateral and digital assets onchain and Fractal was really born out of this whole history that I kind of walk through, and it was actually born before FTX happened. When there were, you know, just even before that concerns around, you know, arguably if Voyager's loan book had been on chain, even if you obfuscated privacy around the users, you would have seen over 60% of that loan book against one counterparty.
And you would have said, okay, that's a risk, right? And so I think there's kind of three main things that came out of all of last year. And the first is disintermediation needs to happen. You saw a lot of these centralized counterparties trying to acquire the entire vertical stack of the financial market. And that doesn't exist in traditional finance and it doesn't exist for a reason.
Right. And you saw what happened with FTX and owned so much of that vertical track. The second is institutionalization needs to happen, right? Realistically, there needs to be a higher bar that's set for these companies where, you know, if someone gives you a piece of paper that says their balance sheet is X, you don't accept that piece of paper as collateral.
You know, that's unacceptable. And then lastly is transparency. And I think this is where it gets really, really interesting. Users need to have better ways to underwrite the risk of the counterparties that they're engaged with. So when a user logs into their platform and they see $20 million, how do they know that that $20 million isn't being rehypothecated in who knows what?
And that $20 million actually sits in that account under their name. And that was the biggest question that came out of it, which really brought everyone back to that was what blockchain technology was built for in the first place. If you think about why Bitcoin was created in 2009, it was because of the 2008 financial crisis.
And, you know, I think this was a rude awakening for all of us to remind ourselves what we need to be building and why. And yeah, I think transparency is going to be a really, really key part of that.
And speaking of okay, so now you have the infra, but nothing exists without your users. So as a co-founder building out basically kind of like a new primitive, how do you think about your different types of users when they come on chain? How do you build products to serve them?
Sure, I think crypto at large still has a UI/UX problem where at the end of the day users don't need to know that the blockchain is what sits underneath. And we've talked about this in the space throughout the five years plus around, you know, obfuscating the technology to just the user interface. Right at the end of the day, as long as the underlying technology makes things cheaper and more efficient, that's all the user cares about.
And we're not there yet. Right. And I think, again, going back to the history of those five years, it's important to just remember that, and my co-founder, who is an engineer by background, will appreciate me saying this, but it takes a long time to build things. And I always forget this because I don't come from that background. But not only does it take a long time to build things, but because these are smart contracts, you don't want these to be hacked.
You want them to be fully audited. I mean, it takes even more time and that's okay. What we saw in this last year's move was that institutions got blinded by a bull market and prices going up only that, you know, some of the risk parameters that they had set internally weren't being followed. Right. People were kind of looking the other way or maybe not asking the right questions.
And, you know, I think it's actually a good thing that that happened and it's not going to happen again. It sets us back to building the right way so that we don't have a catastrophe like that again. But I think we only face institutions. I think on the degen retail side that has still stayed relatively active in the last few months.
And you saw that Twitter came out with integrations with eToro for Bitcoin and ETH purchases. So I think there's definitely momentum on the fintech side. And then on the institutional side. Listen, I mean, it's really a question to the operators. Once the operators can build the technology in a way that fits compliance and passes compliance, then, you know, institutions will come in.
How do you balance building, you know, Fractal, which is an institutional grade financial product, but also something that wants to remain true to being crypto, like what is a product that's both, you know, institutional grade and also crypto native looks like? Like how are you thinking about that as you're building on Fractal?
Yeah, that's a really good question. You know, I think it is sticking to the crypto side. It's reminding ourselves why being onchain is so important and always kind of reminding ourselves like, why was Bitcoin created in the first place? Again, that 2009 thesis story. However, on the institutional side, obviously privacy is very important and so maintaining privacy.
The other piece also is the 24/7 coverage. I mean, it it really blows my mind that DeFi has not built 24/7 coverage for some of their platforms. Having done it at FalconX, it’s a very easy thing to build and it doesn't cost significantly, you know, much for the company. And it's just a must have for institutions to get the kind of service they're looking for and so I think, you know, it's just kind of I would say historically you haven't seen that many folks with an institutional background in DeFi building institutional tooling and so hopefully that changes now with this kind of onchain movement where you are getting this blend of CeFi and DeFi and CeDeFi as people call it, but yeah, KYC KYB, it's a must. I mean, AML monitoring, it's just required. You don't want to be transacting with people on the OFAC list. And I think that's kind of this next generation of crypto that I'm super excited for.
Yeah. Also like meeting our users where they are, right? I do think that is an important piece, like who you're building for and how you are building it for them is an important piece. And people might not like that, you know, but that's the reality of having customers and having users that are a little bit different from you.
So last piece, this is like a fun, fun topic, I think. But I want to talk about you a little bit. I mean, I think I'm very lucky to have known you. And you're someone that I just think is remarkable. You've done so much and you've accomplished so much, and now you're a founder of, like I would say, an up and coming next new primitive and crypto.
But you also, you know looking back, like you've been part of the founding team you've been on the venture side, you've done a ton. What is it like being a big part of a founding team in crypto, I guess for the second time, like the difference between then and now?
Yeah. I mean, apart from the market being incredibly different, you know, I would say a couple of things. The first is, you know, when you are part of the Co-founding team, you drive the way culture is built internally at the company. And I want to address the elephant in the room, but there just aren't enough women in crypto.
And so I think personally, it's been something that was really top of mind for me for years. Going back to Pantera, seeing how few female founders there were, and when you have a female on the Co-founding team, it makes it more approachable for other females to apply to a company that can say, hey, you know, there are senior women, as part of the management team of this company.
And so that was, you know, a really big piece, you know, that was very, very, very top of mind for me. The second is, you know, the nice thing about this whole process and obviously we're so excited to be able to partner with Archetype. But having worked with you and other folks on the team for years now is that we know who the, we were talking about this before but like, friends versus foes in the space but we know who to call.
You know these days we can save so much money. Recently, if you look at just our press release, we didn't use a PR firm for that and that helped us as an early stage startup save enormous amounts of money. And so we know, you know, what players use for KYC KYB, what lawyers to use. And it helps us move so much faster.
And I think that's tremendous. So culture, just speed of iteration. And lastly, just, you know, being the client side to just, you know, understanding the market and understanding the gaps in the market. I think one thing I'd like to draw attention to is I think there's this new CeFi 2.0 alumni class. And it's a lot of friends that I've seen who are early operators at these CeFi companies who saw a few things that, you know, maybe they wanted to do differently or maybe they wanted to tweak it here and there.
Or, you know, in our case, we wanted to bring more of that on chain transparency and blockchain infrastructure into the product. And I think you're going to see this wave of CeFii, 2.0 that took the previous technology and, you know, shifted it for this next wave of users who want transparency, who want to be able to trust onchain data and so forth.
So I'm really excited for that wave. It's a few of them, but I think it's going to really move the needle for the space.
I think that's a great note to end on. Optimistic, very forward looking. I'm going to plug for people who want to check out Fractal - fractalprotocol.org and we'll link your Twitter handle in our description. So thank you for coming on for giving us the history of crypto literally in record time and also just like spreading a really important message.
And I think we need more founders who are more like you and it's important to have you trailblazing out here.
Thank you, that means a lot, and I've been very lucky to have your friendship throughout this entire journey, so I really appreciate it.