There are a few holy grails when it comes to investing in crypto infrastructure. There is no shortage of attempts to build and raise for this opportunity set, though they’re almost always obviously unviable from the start. The deck hits your desk and it is whisked away after a brief scan at best.

On-chain prime brokerage, a scalable new-paradigm stablecoin and oracles are a few of crypto's holy grails. If you’re building the first category and it’s not obviously unviable reach out to us and we’d love to chat. We were lucky enough to back the second category in a substantial way. As for the third: we’re excited to announce our lead investment in Chronicle Labs $12M seed round. Chronicle is a next-generation oracle solution delivering scalability, material cost-efficiencies and true decentralization; the team wrote the first-ever oracle on Ethereum as part of MakerDAO in 2017 and spun out of Maker in Q3 2023. Additional backers include top-tier institutional investors Galaxy Digital, Brevan Howard, Tioga Capital, 6th Man Ventures, Robot Ventures, plus industry OGs like Rune Christensen, Andre Cronje, Stani Kulechov and Mark Phillips.

OBVIOUSLY UNVIABLE

Before we get into Chronicle and why we’re so excited by the opportunity, let’s touch on the presumptuous-sounding obviously unviable. There are a number of reasons this might be the case.

1. Network effects → as a product’s or service’s user base grows, its value increases as well. The most obvious cases include social networks, such as Facebook, Twitter and Instagram.

   • Stablecoins also benefit from network effects. For example, as more developers and platforms integrate leading stablecoins, such as Tether’s USDT and Circle’s USDC, their use becomes more available and frictionless, thereby increasing their value propositions. Circle and Tether certainly benefit from network effects; web3 social has been a trickier path to navigate, evidenced by a graveyard of startups, but we’re confident that will change.

2. Regulatory arbitrage → otherwise known as the Warren Buffet playbook. In the trad equities world we see many cases of this, for example with regulated utilities businesses, which are essentially government-crowned monopolies.

   • This is a bit less prevalent in the crypto world, partly due to the fact that Gensler and his cronies have prevented any semblance of a regulatory framework in the U.S. for the last four years. However, there are examples where certain licenses - like the New York BitLicense or the OCC charter - have funneled a ton of (mandated – I use that lightly) demand that companies like Coinbase and Anchorage have benefitted from (not to take away from their own merits).

3. Deep/complex tech & IP → this one is pretty straightforward. Highly complex and specialized tech can provide deep moats in the startup world. MPC is a segment of the market where leaders experience some degree of this edge. With that said, there are many winners in this market and the obvious unviability typically comes more from a critical tech infrastructure risk where large customers hesitate to trust startups over battle-tested incumbents (if nothing else than for the career risk associated with CTO’s in making these decisions…no one ever got fired for choosing IBM).

   • Unique proprietary data is a prime example of true IP edge. A number of businesses benefit from this, including those operating in the exchange and trading software verticals. Other exciting opportunities we might discuss in the future include proprietary datasets in the art world 👀

4. Scale/cost advantages → certain businesses, like Amazon, operate at such tremendous scale that they can offer prices and various loss-leader strategies that are nearly impossible to overcome. In the crypto world, CEXs are a prime example of who benefit from this.

5. Brand equity → Apple, LVMH, Tesla…Ledger, Coinbase, Solana – a handful of web2 and web3 businesses that enjoy strong benefits from established brands consumers love and trust.

   • This extends beyond consumer products – enterprise cases are often a function of credibility and the aforementioned adage that no one ever got fired for hiring IBM. Chainlink is a prime example in the crypto world.

6. Technologically infeasible → lastly, certain ideas might just be too hard to actually build today due to technological constraints. This is what comes to mind when we consider on-chain prime brokerage that actually works and mimics what is table stakes in trad finance. This won’t always be the case; someone will build a monster project in this space, and we hope to back it. Again, DMs open.

These are a handful of the factors that might lead one to find a given deal or idea obviously unviable. We’ll never whisk a deck off the desk too quickly, but the above provide formidable defenses for today’s market leaders.

Of course, operating as a venture capitalist often requires you to be contrarian in your thinking. It favors the (grounded) optimists. We hope and even assume all of these challenges will be overcome and holy grails discovered and funded; otherwise, we wouldn’t be doing our jobs. We might heed the advice of Winston Churchill, who instructed that “success consists of going from failure to failure without loss of enthusiasm”.

We’ve seen a number of startups defy the odds, execute and go on to win in a major way. Ethena is the most obvious example from this cycle. Solana, MakerDAO and Uniswap are a handful of others from the past. To understand why Chronicle is added to this list, we must first understand why the odds are stacked against oracle startups more generally.

AN UPHILL BATTLE

Brand equity + technological risk --> deadly recipe for whisked off the desk. Chainlink has had a near-monopolistic grip on the market for years. They have a strong brand, their tech works and they’re battle-tested. That’s the story. 

Building and maintaining a good oracle platform is technically challenging (nevermind a great or a novel technology). Relatedly, and most importantly, if you’re a startup founder in need of an oracle – first & foremost, you’re a startup founder. This means you face myriad other challenges, risks and stressors that sit above that of the oracle provider you’ve integrated into your business. You likely have minimal bandwidth to vet alternatives (to the dominant incumbent) and/or you have better uses of your time. Additionally, say you find the bandwidth and decide to go with what you perceive to be a better option for xyz reason, the potential risk of it not working, even for a split second, and causing losses to your customers can be existential. As such, you’re probably going with the incumbent. This tech/critical infra risk is further compounded over time by the entrenching effects of growing brand equity. 

This plus a mix of other strategies, which are beyond the scope of this post, have afforded Chainlink a valuable moat around its business for years. This is not to detract from what Chainlink has accomplished. They - plus others, like Pyth - have developed good businesses and advanced the industry in positive ways. However, they have their drawbacks and the industry needs a superior option. Enter Chronicle.

THE PATH TO BECOMING THE #1 ORACLE

To understand why Chronicle is not obviously unviable, we look back to the key tenets of that suggestion for the oracle space. 

Brand equity → Chainlink’s brand equity is formidable; everyone knows them, many use them and its $15B $LINK token reinforces its position (eg, as a GTM incentive). 

• However, Chronicle spun out of MakerDAO and the founder, Nik Kunkel, wrote the first-ever oracle on Ethereum in 2017 to facilitate the creation of SAI, the predecessor to DAI. Chronicle inherits this brand equity, among other strategic benefits, and not only effectively mitigates this risk but actually creates an unfair advantage where Maker (strongly incentivized via ownership of $CLE) can (/has /will) strongly influence who its partners use for oracle services.

Technological risk → at its worst, some might consider oracles as simple technology; at its best, as is the case with Chronicle, the technology is complex. It’s difficult and costly to develop an oracle business that hopes to compete with incumbents. An error in the technology that causes losses to users could be existential, which reinforces how critical the technological risk is.

• However, Chronicle has developed its core technology for the better part of the last decade (very few teams in the industry have even been around for that long). It has poured a significant amount of resources and capital into its development, and it has been rigorously battle-tested in handling Maker’s growth – including at times securing more than $20B in value. 

Few projects have stronger and more wide-reaching brand equity than MakerDAO. Chronicle’s Maker pedigree and performance in scaling its growth more than 50x helped to flip Chronicle 180 degrees in our deal pipeline from risk of obviously unviable to obviously compelling.

The Ce(De)Fi opportunity is massive, fast-growing and individual clients alone represent opportunities that are larger than the entire sector today. This represents the clearest near-term path to becoming the market leader.

Next we turn to the more exciting stuff – why Chronicle is better and why it will be broadly embraced across both DeFi and CeFi as it sets course to usurp the industry leader. 

Team → the team who literally wrote the world’s first onchain oracle. Nik & team scaled and battle-tested the technology inside one of the industry’s largest and most important protocols for more than six years, and spun out with a well-networked and deeply experienced team to dominate this space.

Hot start via MakerDAO pedigree → support by MakerDAO and its growing subDAOs. This lends not just experience and early nearly-guaranteed traction (eg, in the case of Spark), but also critically-important credibility that provides Chronicle with a hot start (opposite of the cold start dilemma that nearly all oracle upstarts face — going back to the adage that no one ever got fired for hiring IBM).

• Note: beyond DeFi, Chronicle has closed some yet-unannounced landmark CeFi deals that are complete game changers...more on that soon 👀

A clear, scalable business model → that follows traditional software-as-a-service (SaaS) monetization and novel technology that leverages cryptographic mechanisms with drastically better unit economics than is currently in the market.

Institutional calibre → alongside increasing institutional + broader trad adoption (eg, BlackRock and Robinhood making strong pushes in the space), we expect significantly more demanding standards from all players in the space (many of whom won't be able to meet these demands), and especially for those building critical infrastructure. Whether this takes the form of, for example, SOC II compliance becoming table stakes, or transparent, accountable and professional processes, it’s plain & simple that many players in the space today simply don’t come close to meeting the bar of what has been demanded by traditional businesses for decades. If we expect continued convergence and adoption (which Strobe does) these become non-starter competitive edges for businesses like Chronicle.

• As one simple example, the Chronicle Dashboard provides simple, end-user level transparency on Chronicle’s Oracle Feeds and validator network. Notably, it enables any user to potentially verify the aggregated signatures, which is not possible via Chainlink and other oracle networks.

Technology advantages → Chronicle has developed truly novel technology that sets it apart from the competition. This sets the stage for them to win on cost, brand and unique selling points, particularly for the large traditional institutions (eg, BlackRocks and Fidelitys of the world), who will demand more secure and robust infrastructure that is inherent to Chronicle’s design.

• The architecture is centered around a unique implementation of Schnorr signatures, which promote 1) lower cost and 2) more censorship-resistance, allowing for a fixed oracle update cost independent of the # of validators. This fixed cost is 3.5x cheaper than Chainlink and Pyth, and 2.5x cheaper than Redstone. This means that Chronicle’s oracles are highly accurate and update very frequently even on traditionally expensive chains like Ethereum. Further, not only are the oracles cheaper for developers but Chronicle’s architecture also mitigates centralization risk and allows for a greater number of validators and more transparent, onchain validation of audit trails.

• There is a direct linear relationship between # of validators and protocol operating expenses (gas on blockchains). Historically, competitors have opted to maximize profit margins at the expense of centralization. Chronicle has a structural cost advantage that not only allows them to undercut competition on price (if they so choose), but also offers a more decentralized and secure platform (which actually should command a premium). To add specifics, the average number of Chainlink validators required for quorum is 11; worst yet, for their L2 oracles, the quorum is just 4 (note: any 3 can update the oracle). This is far from permissionless and represents material risk of collusion.

  • This has resulted in a moral hazard to minimize the number of validators (reducing security & decentralization) to keep costs constrained. Due to lack of true competition over the years, Chainlink has been able to get away with this suboptimal and risky status quo. 

• The solution: in short, Chronicle’s tech compresses validator signatures and effectively decouples the relationship between the # validators and operating costs. Importantly, Chronicle’s tech is not theoretical – it has been battle-tested for years across chains and securing $ billions in value for the space’s largest projects.

OWNING THE RAILS OF THE FUTURE

The Pennsylvania Railroad operated between 1846-1968 and was known as "The Standard Railroad of the World". It was a pioneering railroad known for its technological innovations, extensive network and financial dominance in the industry. In the late 19th century it became the largest railroad and corporation in the world and it standardized (and set the bar for) many aspects of the industry, as part of its legacy.

As far as onchain infrastructure goes, there is not much that is more critical than oracles. In order for our industry to thrive, it needs its Pennsylvania Railroad moment – that moment and steward is Chronicle. We couldn’t be more excited to back, fuel the growth of and own our share of these rails of the future. 

Chronicle is redefining access to cost-efficient and verifiable data. Together with its warm start problem + brand equity Chronicle is set to disrupt the oracle space across both DeFi + CeFi and scale massively to become the world’s largest and most trusted source of truth that enables onchain transactions. Chronicle is driving the adoption and growth of web3 and catalyzing exciting convergence between the off- and onchain worlds.

--

The views expressed here are those of the individual Strobe Ventures LP (“Strobe”) personnel quoted and are not the views of Strobe or its affiliates. Certain information has been obtained from third-party sources, including from portfolio companies of funds managed by Strobe. While taken from sources believed to be reliable, Strobe has not independently verified such information and makes no representations about the current or enduring accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Strobe has not reviewed such advertisements and does not endorse any advertising content contained therein.