Why We Invested in Staging Labs: Blockchain infrastructure Startup Protects Consumers from Fraud
At Flourish Ventures, we invest in infrastructure that has a strong potential to build a fair finance system. Despite our own reservations, we also recognize that crypto is a meaningful part of the financial lives of a large number of people, in particular in emerging markets. For example, between 2021 and 2022, 35-55% of the adult population in many emerging markets traded cryptocurrency at least once per month. In Africa, transfers under $1,000 accounted for 80% of all crypto transactions. For many, owning crypto is an attempt to protect savings against persistent double-digit inflation in local currencies.
The recent events in the U.S. banking industry are a reminder that the regulatory and system protections that are needed and that we often take for granted in the traditional financial world don’t extend to the crypto world where consumers still continue to engage unprotected. Despite the looming uncertainty over the future of crypto, we believe that strong infrastructure layers will be needed to protect consumers. Regulator-required investor protections will raise the bar for what that infrastructure looks like.
One area is how consumers recover from fraud and scams. Illicit transaction volume in crypto, one measure of fraud and scams, rose for the sixth consecutive year, hitting over $20 billion. This is independent from the large-scale shocks and scams (from Terra Luna to FTX) that have made headlines over the last 12 months. The widespread expectation in the crypto and decentralized finance world is that users have to protect themselves and scams and thefts are arguably a feature of a permissionless system. Immutability of the blockchain means the onus is on the user before the transaction is even initiated.
We are excited to back Staging Labs to contribute addressing these issues and help protect everyday consumers from crypto fraud. The founders, Frankie Le Nguyen and Jake Harwood, stood out to us for their focus on empowering consumers of crypto. Their business idea was born out of Frankie’s personal experience of losing a sizable amount of money in a phishing scam on Discord, as he experimented with crypto. Frankie and Jake soon realized that their experience was common among a wide range of everyday participants, from novice to expert users of crypto.
Widespread existing solutions in this space that have received funding over the years are not designed to help users once a transaction is initiated. They focus on two areas – before a transaction is even initiated i.e., private key management, scam tracking and alerts, audits and others; and after a transaction is finalized on-chain, i.e, on-chain transaction monitoring. Law enforcement focus on illicit transactions is on large-scale activity, including money laundering and terrorist financing.
Staging Labs intends to develop a series of solutions that help protect everyday users once a transaction is initiated and before it is finalized on-chain. Their first product, Saferoot, which can integrate with major crypto wallets, will automatically send assets to a user-determined safety wallet or vault, after a transaction involving those assets is initiated and determined to be potentially fraudulent. Once Saferoot spots a suspicious transaction, it sends another transaction in its place so as to move the asset before the suspicious actor can steal the funds. While this technique has been used by arbitrage traders, it is a new technical challenge to implement it within a short amount of time.
Staging Labs emerged out of stealth on March 15th with the announcement of its early-stage funding in TechCrunch. The pre-seed round includes many industry actors. Our hope is that solutions of the kind Staging Labs develops will become part of the essential feature set of any future blockchain-based financial system.