The $4B Blockchain Data Platform with Chainalysis' Michael Gronager

It's a good question and I always love to tell the origin story. So before Chainalysis, as you mentioned, I was at Kraken, the crypto exchange in San Francisco. I saw some parts of the early industry. I've been in crypto for more than ten years. In the early days, we were all curious about how to build a great company in crypto, how to be famous, how to do the right things. To be honest, the only thing you could really build in the early days in the crypto space was exchanges, because you needed people to get access to the crypto space. It's very much an analogy with the internet: initially, the only thing you could do was provide people access. You could build some content, but basically you wanted access to crypto.

Looking at that, we also heard a lot of rumors about being abused for criminal activity: people could buy drugs, there were rumors about terrorist financing, a lot of other things happening in the early days. At the same time, working further at Kraken and looking at how we could set up shop in Japan, how other things could happen, which was an important part—talking to regulators in Japan, talking to banks all over the world—I kept hearing the same concerns: how do you do transaction monitoring in crypto? How can we even understand the original funds? How to assess how much is being used for various purposes? How can you get some degree of transparency into this cryptographic value transfer system?

To understand how to interpret them, what was actually going on in the blockchain, and then thinking through that, I said, 'Okay, can you build an algorithm that can somehow give an image or picture or map of the blockchain that will enable people to understand what happens here and enable you to build all kinds of data you want on top of that?' So that was really the core challenge that I tried to solve initially. Fast forward, we then built the biggest database in the world of connections between real-world entities—exchanges, dark net markets, everything that you can find in the crypto space—and digital identifiers on the blockchain. So you have a transaction, any media, do you know who sent it or received it? And that is the foundation for everything we build.

Think about it the way that we copy everything. The only right answer to this is basically everything. It doesn't mean that everything is there as of today, but if it's not, it's there tomorrow or it's in the pipe of happening. Of course, there's a little bit of lead time between the genesis block of a new token project and when we have it in our product, but in principle everything is supported from the onset. That's the focus. For me, everything that moves on public blockchains is something that we have support for in the product.

Yeah, we do. Basically, what happens over the years: if you build this simple algorithm—is this transaction, two transactions done by the same others? Well, you can create something and suddenly you get a signal and you have something that looks about right, but of course it's not precise. You can take the analogy to the PageRank algorithm that Google invented initially. Of course, it kind of worked initially and you're all happy about it because it was better than AltaVista, but it was not really anything amazing. In the early days, we had a simple algorithm. We improved that over the years by getting to work with customers and law enforcement to get access to that, and suddenly we have a very good understanding of what's happening on a blockchain.

Once I had the first database and a back-end that kind of worked, you could run different queries, but you soon realize that if you try to sell that to anyone, they're like, 'I don't know what it looks like, I need some UI in front of that.' So building Reactor was the first input here. Basically, visualizing the map of the blockchain. Reactor is about how they interact with each other. There might be other wallets that you want to understand how they are interacting. You might have a lead in a case if you're talking law enforcement. There might be a specific lead and they want to follow the flow of funds until they find, 'Ah, that's actually the same person, our target here, used a crypto exchange in, let's say, Slovenia, and we can reach out to them and ask what's the identifying information of the person,' and suddenly you figure something out. So that's an example of a use case for Reactor. It's also being used for enhanced diligence in a compliance setting and just for people to click around and try to understand what crypto is actually about.

But that doesn't really scale when you move to millions of transactions. You can't investigate all of those. So we created KYT as a transaction monitoring capability where all transactions are screened, and only those that show any kind of suspicious behavior—either in structuring or interaction with dark net markets or illicit sources or other things—then we would surface those to the compliance person, and they would run it in Reactor and figure out what actually happened. So that was KYT. The other thing we saw was a need mainly from established financial institutions. If they wanted to bank a crypto exchange or other crypto businesses, they needed to understand the space. For example, the second biggest exchange in the Netherlands has customers typically getting amounts of two hundred dollars—that's the amount they're selling and trading—and they're using them, by the way, to do online gambling or maybe a gaming service somewhere. Suddenly they got a good helicopter view of the crypto space that made it comfortable for them to provide banking services to the different players in the space and also just to understand what businesses in crypto were doing. So that was Crypto. Then moving into the business intelligence piece, Market Intel. Market Intel is very much around some of the stuff I mentioned before: you want to assess what is going on in the crypto market today. For example, if you see a lot of small transactions moving into crypto exchanges but no big transactions, you don't see any whales leaving the space, so you expect that the market movement will be temporary. You can also say, 'Oh, China is liquidating all the assets, but it doesn't happen in Europe,' so we know that the first movement comes from China. These things we can assess from the data, and that's of high interest from regulators and investors into the space to understand what is going on. Then the final piece is business intelligence, using the same data just to understand what are people doing in the crypto space.

Yeah, there are a couple of those. I think it's always tempting to grab some of the law enforcement stories because they're always juicy and people always like to hear about it. But take, for example, the Colonial Pipeline. We released a blog around that one, how we collaborated with the FBI. The FBI used our products to figure out what went on in that case. Without going into too much detail about what actually happened, they realized that the blockchain movement is part of a bigger wallet, and now you know that wallet has been active before. Then you realize what exchanges they have sent test transactions to, where they are intending to liquidate the funds. Another fun story that's way closer to home: this happened between Christmas and New Year. My girlfriend comes to me and says, 'Hey, my Instagram account has been hacked. Someone is asking for a ransomware payment to give her account information back.' I start chatting with him. He wants to get paid a thousand dollars. I negotiated down to 700. I found his email that was being used. Then when I pay him 700, I already know that I'm sending it to an account that's frozen already. But it's very hard to find the law enforcement agency that wants to run that case because for them it's 700. I can't approach anyone and say, 'I got 700 stolen in Bitcoin,' and they're like, 'Okay, that's not interesting.' So that's another example. What we are trying to do in these cases is to present the entire size of the case and go to a local law enforcement and sell it to them, saying, 'This is actually something that could be solved, and this could make life much better for a lot of people if you went after this case.' So that would be another example of stuff happening on the blockchain.

From Square, they became Block. So the options became very interested in crypto data. We saw it from Robinhood, we see it from PayPal. They want to do something in the crypto space. It's typical: you see the newer players in finance probably grabbing this. They grew a lot from just doing finance on the internet in the early days, so they clearly see that this new technology can properly grow their wallet share among their customers even further. So they entered the space and had a lot of appetite for that. Today, it's become a core part of the revenue for many of them, and clearly something that's important. So for all practical purposes, you would call them crypto businesses. Then what happened a little more than a year ago was that some of the more traditional financial institutions wanted to store crypto in your bank, but you don't provide custodial services in crypto. Then we saw an influx of enabling custody on traditional financial institutions. So I would say we are at a point where a lot of financial institutions have become crypto businesses, and many most of them have a plan to become it. So that's where we are in the adoption curve.

Yes. I think the way I look at this, and others have made this analogy before, is comparing the growth of the internet with what happens in the crypto space. When you look at NFTs, when you look at gaming platforms and other things, you actually have content on the blockchain for the first time. So that's the first time you really see a use case that's inherently tied to the digital world. Before that, it was basically investments into the underlying asset and driven from speculative or investment purposes. Now we clearly see this trend that people want to buy an NFT, play a game where the stakes are actually real money or the feeling of real money, and the feeling of real rewards if you are good at the game. We are seeing that happening. So I think they are extremely important for showing the future of the blockchain. For us, it's the same: being able to support those services in the best way and ensure that customers on those services get the best possible journey.

Yeah, I think it dovetails to the question you had before around NFTs and others. When we looked at the early days of crypto, everyone that was a company in the crypto space was a financial institution. Now, as we said in the question before, every financial institution is becoming a crypto company as well. But they're all regulated, they all need compliance solutions, and so on. But if you now look at the new companies entering the space, they are not financial institutions. They are gaming companies, they are NFT marketplaces, they are all kinds of things. And I think some of the things that they start to need and understand is to understand what their customers are doing, how their customers are using their platform. I think that's another area, and that's where we look at the business intelligence side and understanding the customer space. I'm very focused on that this year, and that's clearly something we see as a core focus of what happens in Chainalysis this year and for the company itself.

We have built a really great leadership team over the last year. We have hired a lot of great execs. We are maturing the company in various ways with the right processes, the right structures internally, and doing all of that. We are more than 600 people today and growing to more than a thousand this year, so clearly in hyper-growth mode. My focus is basically trying to ensure that everything grows roughly in sync and we have roughly the right assessments of where we should grow, and then basically execute on this opportunity. How can we monetize the data that we have in various ways? How can we best build products for the crypto space to accelerate the growth of the crypto space, which has always been the mission?

I think maybe a project that I really think is cool technology is the Helium network. I think that's an interesting network because it basically connects the real world with the digital world in a very nice way. You can do things like proof of location and other things that you can use. If you look at the adoption from a lot of IoT projects and others, they start to depend on them, and things are being built on top of that. I think that's the first time we've seen that in the crypto space, where having crypto as a core component enables something that wasn't possible before.