Original interview link: WEB3 Founders Real Talk with Covalent Recap
Ganesh's experience and Covalent introduction
Blair: Hello everyone, welcome back to Web3 Founders Real Talk. Here we will meet real industry disruptors and have honest conversations. Today, we are very happy to invite Ganesh, CEO of Covalent. Welcome!
Ganesh: Blair, I’m so glad to have me on the show and I look forward to further interacting with the community.
Blair: Thank you very much for coming. Could you please briefly introduce yourself? How did you get into the cryptocurrency industry and how did you start your project? Also, please briefly introduce Covalent.
Ganesh: I’m Ganesh Swami, one of the founders of Covalent. Covalent has been around for over five years, so it’s one of the older projects. I got into crypto pretty by accident. It was just a chance that got me into this space. I wasn’t working in crypto before, I actually came from the database space, building data infrastructure. Before that, I was doing cancer research. I did physical chemistry research and built antibodies for drug design. I was part of the founding team of one of the largest biotech companies in Canada, which is listed on NASDAQ and has several drugs in clinical trials. That’s my background. I switched because it takes 10 years to build a minimum viable product in pharma, it takes time. My friends in IT only need 2 years to launch an MVP and go to market, raise funds, and do M&A. I also wanted that fast pace. So, I switched to data infrastructure. That was when cloud data warehouses became popular, like Snowflake. A lot of on-premises workloads were moved to the cloud. The cloud was like a new infrastructure piece. I helped a lot of companies move to the cloud. I worked in a coworking space for about ten years. One of my mentors told me that you should go to a decentralized database project hackathon. It was during the bull run of 2017. I was like, well, I’m in Vancouver, and it rains a lot in Vancouver, so I didn’t have anything else to do on Saturday, so let’s go check it out. I knew that in the database world, ultimately it didn’t matter what database you used, people still wanted to do analysis in Excel. That’s the front end of all databases. Whether it was Oracle, SAP, or Microsoft, it was the same. What I developed in that hackathon was a way to get blockchain transactions directly into Excel. That was the idea. It was like a search engine, Google on the blockchain, whatever you want to call it. This was in 2017, and there were only ICOs, very simple things like ERC20 and transfers. That was it. No DeFi, no NFTs, nothing complicated. We ended up winning that hackathon, and we were like, this is a cool idea that could open up a lot of things. But where did I go wrong? It was market timing. Because the next two years were a bear market, and it was very harsh. So please don’t take my advice on market timing, my track record is terrible. Anyway, we started this company called Covalent. If you remember your high school chemistry class, the word Covalent comes from the word covalent bond in the chemistry vocabulary. We're tying together centralized and decentralized systems, databases and blockchains, and so on. That's an analogy. That's the origin story of Covalent. We started this company, essentially, thinking of the blockchain as a database. You can query it, you can index it, you can do all kinds of things from the blockchain. The first few years were a tough time. Then DeFi Summer came along, and the timing was right, and the product was right. People will say it was like an overnight success, but we had been working on this for about two and a half years at that point. There were some ups and downs along the way, but overall, that's our startup story. If it hadn't rained in Vancouver that Saturday, maybe Covalent wouldn't have existed. It's that simple. The core idea here is that no matter what infrastructure changes happen behind the scenes, people don't relearn or retool. They don't give up Excel. They don't retrain their existing workflows, and their existing business processes have to adapt to the changes. So people need this kind of bridge broker, like a middleman. That's what Covalent has been providing to people since day one. We've never really pivoted or changed anything else, that's our model. Today, it’s been given different names, some call it an indexer, some call it a data availability layer, etc. But fundamentally, what we do is make blockchain data more accessible in a decentralized way.
Challenges and resistance
Blair: That's the most interesting story I've ever heard. It's all about the weather, and I'm glad that Vancouver has a lot of rain, which is why you were able to start Covalent. You found an important product pain point and started this amazing project, and it's doing great now. I'm wondering if you've encountered any challenges or resistance in this journey? Like you mentioned, the timing in the context of the entire crypto industry, that can be a key indicator. Did you encounter any technical challenges or macro challenges or anything like that?
Ganesh: I'm a serial entrepreneur, and this is my fourth startup. There are risks in any mission-driven startup, and they are often bundled together. For example, there is market risk, which is where we failed in the first two or three years. There is product risk, technical risk, financing risk, and team risk. All of these risks are intertwined. We faced financing risk because no one wanted to pay in a bear market. There was market risk because the market didn't exist at the time, and there were no applications. We built the product. We are pretty good engineers, a good team, and my other co-founder Levi has been building databases his whole life. He undoubtedly knows much more than I do. Of course, there are financing risks and technical risks. On the other hand, we were lucky because the EVM won out and basically everything became the EVM. Some teams bet on EOS, Cardano, and Solana, and they are doing well. But any project that bet on non-EVM, such as XRP and Elrond, has now failed. Technically, we were very lucky to choose the EVM. These are some of the risks, but the biggest cruelty is still in the financing and market risks. After two years of working day in and day out at Covalent, we didn't rely on outside capital. I was disillusioned with this business. I wasn't the only one who was disillusioned, but a lot of people pulled out in the bear market, as you've seen in previous bear markets. One of my mentors suggested that I take some time off and change my perspective to see if this was really the right industry for me. So I went and climbed Mount Everest. It was a very difficult journey, but I spent a lot of time alone, eight, nine, ten hours walking alone. The whole team was together, but I was immersed in my own thoughts and had a lot of time to think about problems. I got some great insights in the Himalayas. One of them was, since we have all this blockchain data scraped, why not use it, see their traction and do outreach, see if other people need our product? So we came back. I came back in October, and I made it through those four months of November, December, January, and February, and I didn't take a break for Christmas. We found product market fit, started to have revenue, and gained consensus, and this is where the flywheel started. Another chance, like a different perspective. We have all this data and we can see the share of different protocols. So why not reach out to them? I would say those are the big resistances and challenges. And then there is also the challenge of people not understanding the value of indexers because all the data is public. What is the difference between Etherscan and Covalent? What is the difference between The Graph and Covalent? But these are constants, and it’s part of the journey. But first I would say the biggest challenge was getting this off the ground, and it took us almost three years to see the light of day. Those were long and hard days.
Blair: Yes, but it’s also impressive because this space is still so new and we still see some entrepreneurs struggling with product-market fit. Sometimes I feel like entrepreneurs have to be selective about what they’re doing, not just because of their interest or a certain opinion.
Ganesh: There is a thing called product founder market fit.
Difference from other data solutions
Blair: Yeah, that's exactly what I wanted to talk about. Can you give us a quick overview of your product range? Because I see you have a Unified API and GoldRush. Also, what cost savings can developers expect with your product compared to manually handling data retrieval and processing through RPC? I'm not from a technical background, but I think this might be a question that some people are wondering about, what the difference is between the two. Also, how is it different from other blockchain data solutions like The Graph?
Ganesh: Okay, that's a great question. Maybe before we talk about different kinds of data solutions, the point is that blockchains are billboards, not databases. On a billboard, you post something, and a week later, you take it down and post something new. That's the blockchain. The whole purpose of a blockchain is to put it into a challenge window and see if there are any challenges. After the challenge, you evict it, expel it, and then move on to the next operation. You evolve the state machine, which is the core of the blockchain. A lot of people misunderstand this. They don't understand that blockchains are for state propagation, not for storing any historical data. That's a key point. The second problem is that every blockchain has nuances, some use POS, some use POW. You see all kinds of new Rollups and DA solutions. Some use Call Data, some use Blob storage. From a developer's perspective, they just want to see token balances, NFTs, cost basis, and standard information. They don't care about the technical details, it's not important. So a unified approach makes sense. This is very new for Covalent, we built a unified interface for all the blockchains we index. We index about 200 blockchains, including testnets. So if you integrate Ethereum, you just change one character, and then you can integrate any other blockchain, like Polygon, Arbitrum, Phantom, Optimism, Base, Mantle, and so on. For any EVM chain, you just change one character. You build the user interface, and then everything just works. This is very popular among developers because they don't want to rebuild the entire stack over and over again for all the different chains. There are also some important aspects, which is to understand the data stack itself. You have data products like Coingecko, which are more retail-oriented, so they provide high-level statistics, market capitalization, circulating supply, etc. This is not really on-chain data because some of this data is also off-chain, but it is for retail users. Then there are infrastructure layer indexers like Covalent and The Graph, which provide structured data. Then there are RPC, which is a layer lower, like Alchemy and QuickNode provide raw data. That's the level. Our expertise is in structured data, because RPC gives unstructured and messy data. So that's one of the key differences. The value of an indexer is taking all this raw, unstructured data from RPCs or the blockchain and then presenting it in a usable, easily consumable, and easily readable structured way. That's how the whole stack is organized. Moving on to The Graph, I think there are two different philosophies when it comes to building indexers. The Graph has subgraphs, and Covalent has a unified API. In a subgraph, you create DApp-specific endpoints, but each DApp has its own schema and structure. Whereas in the Covalent approach, it's a unified schema. It's not specific to one DAPP or anything else. The use cases, the appeal, and the customer base are all completely different, but they're both solving the same problem to some extent. What's interesting is that about five years later, The Graph is becoming more like Covalent, and Covalent is becoming more like The Graph, because each is trying to expand its scope.
The process of creating a flywheel effect
Blair: That's interesting. I noticed that you guys highlighted a lot of things to achieve in Covalent Vision 2024. Now that we're a quarter in, you mentioned that EWM is very critical, which I understand. But I wanted to ask how your team makes decisions on the roadmap? Because there are so many things involved. Can you give us an overview of where we are at? Which of these projects will be the focus of your attention?
Ganesh: I think there is order in the chaos. Even though it looks like there are a lot of things, it's actually like a puzzle, it's a holistic project. Let's take a step back and understand the flywheel. Covalent indexes blockchains. We index blockchains, so the developers and DApps on those blockchains use Covalent. As they use the product, those DApps want to go multi-chain. So they get more data from Covalent, which means more use cases are unlocked. When you unlock more developers and use cases, more blockchains will want to come on board and take advantage of those use cases and developers. We've indexed 50, 60, 70 blockchains, and all of them are attracted. We don't do any active promotion. They want to say, come on over, they have all of this product and attention. For example, Rainbow Wallet. Rainbow Wallet is very popular. All of the data comes from Covalent. They won't go to a new chain unless Covalent supports it. So we get a lot of requests for DApps. For example, we announced the Blast index, but it wasn't because the Blast team asked us or we reached out to the Blast team, it was because Rainbow asked us to support Blast. For Rainbow, all they had to do was change one character. They just changed one character and all of a sudden Blast was supported. Everything was supported on Blast. So they didn't have to rebuild anything. It was very convenient to use. That's the flywheel effect. All of this is like a flywheel that keeps spinning. The key is the introduction of the token. All of the revenue from the demand side, the developers, is a pay-per-use API, so it starts out free and then starts paying revenue. That revenue goes to the operators who run the nodes, who are also CQT holders. That's how the whole flywheel spins, and that's how the decentralized economy starts to grow. It may seem huge, but the things about our community program, the fee buybacks and conversions, the EWM, our product listings on the demand side, our developer grant program, the more indexes we provide for all the Rollups and Rollups as a service, are all part of this huge flywheel. It keeps spinning faster and faster. It's all part of the same plan, it just looks like decentralized components.
Product Development Progress
Blair: It may seem like things are a little disjointed, but like you said, everything is very connected. How is it going? What kind of product developments can we expect to see in the future? Can you give us some insight?
Ganesh: No problem. The key point here is one of the points that we highlighted in the review last year, which is the fee conversion mechanism, which is the proceeds from external sources, which is basically the proceeds from customers paying the proceeds, which is used to buy back CQT and distribute it to the operators. This mechanism started about 45 days ago, and it bought $1,000 worth of CQT every day. Maybe in the show script or somewhere else, I can share the wallet address. It bought $1,000 every day. Sometimes the price of CQT is 20 cents, sometimes it's 40 cents. It doesn't matter. As the demand side proceeds increase, it will basically determine the price floor of CQT because it's buying anybody who wants to sell. That's the price floor. This mechanism is now live. This is an exciting update and the final picture. The other thing is the staking migration, back to Ethereum. So far, we have been using Moonbeam for settlement and so on. I think in general the Polkadot ecosystem is not as good as it should be. So we migrated the staking back to Ethereum. All the audits have been completed. The next thing is the EWM testnet, the incentivized testnet. It's almost ready. Then double down on the AI and DA narrative, build more products and engage in the community. Everything is going according to plan.
Use cases for AI models
Blair: Hopefully, it goes well, it sounds like a lot of work. I know from your social media that Covalent is making a big push into AI, and can provide a very rich historical and real-time Web3 dataset. How does this work? Can you name some specific use cases for AI models? Web3 and AI have been interacting for a while, but we are currently discussing some real legitimate use cases. Can you name some?
Ganesh: No problem. The key to large language models, or LLMs, is structured data. It's the input to everything. It's the data that's needed to train these large language models. The whole point of Covalent is to have all this structured data. You can feed all this structured data into these language models, and then you can fine-tune your existing base model, any model you want, and then you can start inference on it. That's the whole process. It's very similar to taking structured data and then running a query node and querying that structured data. It's a database product. You just go from big data to big models. It's like a transition. It's a very natural extension for us. We were quite surprised when the market started using Covalent for these use cases. And it makes sense. Structured data is like cleanly formatted, normalized data. Who wouldn't want that? So we started seeing a lot of use cases. We recently did a post about all the AI use cases that are being built today. Maybe we can put that in our show notes or somewhere else. Smart Wheels is an example. Smart Wheels is a platform that does on-chain copy transactions. You can look at any type of wallet, they do summaries across multiple wallets, and then they use AI to say if this is a trap or a scam. Smart Wheels is a really good example of a project that's doing really interesting things. Another example is Leica. Leica.AI uses AI for analytics. You can see a lot of examples here. Again, we're not at the analytics level, we're not at the retail level. They use all this data for training, and then they can do complex analytics on the tokens if you want to do research or other uses. Leica is a great product for that. Another cool thing I've heard about recently is Entendre Finance. It provides anomaly detection and predictive analytics, which is very attractive for financial management. In the background, they look at your payroll and expenses and so on. They can use AI for fraud detection. Another example is bitsCrunch. bitsCrunch is a project that recently went public. They did a token sale. Their investors include Animoca and Coinbase. They use Covalent data for fraud analysis and all kinds of things. So the underlying data behind these projects is provided by Covalent. These are just some of the use cases, just like we started Covalent before DeFi, NFTs, and GameFi came out. The market has evolved in different ways, but that's at the application layer. We are at the infrastructure layer, and we can enable all of these use cases.
Application of CQT in the ecosystem
Blair: That's impressive. It's great to see that you're enabling these innovations and that people are initiating change and making an impact because of Covalent. You mentioned CQT a lot in our conversation today. Can you elaborate on the specific role that token plays in the ecosystem? I think this may be another unique feature compared to other products. In addition, you recently launched a token buyback program to turn offline revenue into on-chain revenue. Can you share more insights on this?
Ganesh: CQT stands for Covalent Query Token, which is a token used for staking and governance, and it’s very important to the Covalent token economy. Based on our experience in the market, developers and consumers of products don’t want to use tokens for payment. It’s kind of like a bifurcation. The tokens in these people’s hands are like antiques from 2017, and they don’t make sense. So everything on the demand side, all the revenue that customers are charged is denominated in US dollars. It’s fixed. There are no challenges, forecast budgets or anything else. So the US dollars are then used as an on-chain mechanism to buy CQT. When I mentioned a thousand dollars a day, that thousand dollars is from customers. And then the CQT purchased based on the market price is distributed to the decentralized operators who actually perform the work. They get CQT. So the analogy is that I hired some contractors in the Philippines and I paid them in their local currency because that’s the currency they use to spend. I can pay them in US dollars, but they will convert it to their local currency. That’s it, the entire Covalent economy is based on CQT. There are other utility functions, like we will launch a program like liquidity staking, and participating in the delegated staking program is another utility function of CQT. As a token holder, you can choose to delegate your CQT to one of the operators. We have about 14 operators, and we will publish a post to recruit more operators. They are responsible for running the actual infrastructure. You can delegate your tokens to them. We have a whole token economics program about incentives for long-term data availability, and even use cases for AI. Maybe you saw the New York Times lawsuit case, they sued OpenAI because they used all the New York Times articles to train their data. So if there is any bias or any benefits, then the royalties have to flow back, which means you need to record all the mutations made to the base model. All of this, like blockchain, is a perfect use case for this kind of thing. Back to the token, it is a normal ERC20 token. It can be traded on OKEx, Uniswap, Sushiswap, KuCoin, and Gate. You can hold this token and participate in this economic system. As a delegator, you can hold CQT and get the benefits. Or if you have enough skills to run the infrastructure, you can also become an operator. This is roughly how the system works behind the scenes. In addition, you can also provide LP in DeFi.
Strategic plan for revenue growth
Blair: This is a very well designed mechanism, especially for all stakeholders in the game, who are incentivized. Given your very ambitious revenue growth goals, can you outline your strategic plan? Given the steady growth of your institutional users, do you foresee that the unified API will significantly drive this growth? You now have two pillars in your product line, one is GoldRush and the other is Unified API. Which one will be your trump card?
Ganesh: We have a different approach to revenue generation. On the demand side, we have three products. We have the unified API, Increment, and GoldRush. The way we designed these products is to think of them as multiple ingredients, or the same set of ingredients, but making multiple recipes. You have this structured data, and then you have the unified API, Gold Rush which is the blockchain explorer, and Increment, which is a dashboard product similar to Dune, all based on the same data. That's our approach, to get multiple use cases and personas based on the same indexed data. We have set very ambitious goals for revenue generation. We have been growing sequentially for months. As for unlocking, there are some unique opportunities coming up in the future. The first is the RPC-related thing. The current situation is that all the RPC providers are not storing historical archival data. So now the entire industry is consolidating around Covalent to some extent, because the purpose and long-term goal of Covalent is just like EWM, which is to preserve the complete history of the entire blockchain. We have a very customized architecture to achieve this. We have an agreement with Infura. Infura is now starting to direct traffic to us. We can see a few other similar opportunities, I can't name them, but they are all starting to migrate their backends to Covalent as a stack. So we should see significant revenue growth from this move. Beyond that, we have some missing pieces. We've laid this out in our vision for Covalent. We've been very candid about some of the gaps that we have in our data stack. One of the biggest gaps is data tracking. Data tracking is a gap that we have for the toughest forensics and accounting cases. We're working hard to make progress and fill that gap. The whole team is structured in such a way that whatever actions they take will drive future revenue growth. This is a completely different part of Covalent, and they are motivated and driven by different reasons. So I'm very confident that we will achieve all of our goals. It's just a matter of product delivery, product pipeline, marketing and sales, which are different parts. I don't think there are many companies in the industry that have this kind of systematic ability to build products outside of the token space.
Views on centralized data indexing
Blair: Thank you for sharing all these insights and behind the scenes stories, it sounds like your mechanism is very complex and well-designed in every aspect. Looking forward to seeing more innovations from Covalent. Let's look at the bigger picture of data indexing. How do you evaluate the current on-chain data market, focusing on decentralized data indexing? Because there are also centralized data indexes in the market.
Ganesh: Frankly, I think centralized indexers will eventually go away. We saw dozens of indexers come into the market in the last cycle, and most of them are gone now. We are seeing a lot of indexers coming into the market now, and I don’t know what will happen to them. I think centralized indexers are not really in the spirit of decentralized technology, especially if you want to feed this indexed data back into smart contracts. The trust assumption on the data needs to be at the same level as how the data first entered the blockchain. If that trust assumption is broken, then the overall potential size of the market is limited. That’s the thing. For example, if you look at Celestia, Eigen DA, or Avail, the trust in Celestia needs to be exactly the same as the L1 network that is securing it. Otherwise, people will hack Celestia and commit fraud on L1. So it’s important that the setup is the same here. I think centralized indexing service providers may attract some customers, maybe a few million dollars, and may be suitable for some simple use cases. But for the toughest use cases, which is what cryptocurrencies are for, you need trust and security. We never viewed centralized indexing service providers as competition because we have been in this industry for a while and have seen these people come and go and make a lot of noise. Last year Paradigm invested in a project called NXYZ. They raised $40 million, but a year later they died. This happens all the time. We see these centralized indexers just don't work in this space. There's a lot of criticism about decentralization when it comes to decentralized indexing service providers. But if you look at the backend, there are some centralized parts, including Covalent. We've been very transparent about our efforts to decentralize over time. If you think about who's trying to introduce the vision of something brand new, Covalent is the only indexer that has cryptographic security. Every change to the data is cryptographically proven and anyone can audit it. This has been running at scale for years. The first version on the network was launched in the summer of 2022. That was in April, exactly two years ago, and despite the normad cross-chain bridge attack and all the changes, the network itself has never stopped. So, I think a lot of projects die from lack of focus, not because their core functionality doesn't work. We don't think about what other projects are doing. We focus on the needs of the industry, the needs of our customers, and the hardest problems that need to be solved that will lead the industry forward. Everything revolves around cryptographic security. When we built all this two years ago, no one was asking for this. Two years ago is when we released this. We've been working on this for four or five years. But this is what the industry needs, and this is how to move this space forward. We are the leaders in this journey, and it's important for us to let people know that.
Trends to watch
Blair: I really admire your mentality. I feel the same way because those centralized players sometimes make a lot of noise, but one day it will backfire. I know you don't want me to ask about anything related to investment time, but are there any notable trends that you are watching that you want to share? There is a lot of speculation about this cycle regarding your business data metrics, whether it is the data index volume from Layer1 or any other type of metrics.
Ganesh: I would say the revenue of Covalent is real. Real customers are paying to use the protocol and the data. That's a testament to the quality of the data and the quality of the service. No other index has revenue of this scale right now. We have clients like Fidelity, EY, and so on. That tells you how trustworthy the data is. Second, in terms of impact, we did a calculation a few weeks ago and there are over 250 million wallets using or benefiting from Covalent's data. That includes all wallets, all custodians. If you look at Jump's custody product, they all love using Covalent. Projects like Ambient Finance is on Scroll, AirSwap, SushiSwap, all of these projects use Covalent's data to enrich structured data. There are over 250 million wallets in the industry. That's real. That's the number of unique wallets we see using Covalent data. The proofs submitted on the chain, anyone can download and reconstruct the entire Ethereum state from the Genesis Block. That's real, and you don't even have to talk to us. You can just download these proofs and reconstruct the entire stack. I would say these are real things that are on Covalent. In terms of trends, at the ETH Denver event, I participated in several panels. I'm pretty sure the cycle is the DA cycle, the data availability cycle. I would say there's also a big push around AI. It's a macro trend and it's very exciting. I feel like LSD, LRT seem to be the focus of a lot of people. I'm not a finance guy, so I don't understand the intricacies of these liquid re-staking tokens and the risk factors, but it seems like there's a lot of attention on these tokens. Maybe with the Eigen layer and re-staking and so on, there will be a lot of changes this year. But we just focus on the best position we are good at, which is data, data availability, and AI.
Blair: Thank you very much for sharing your expertise today. The Web3 industry is still in its infancy. In this field, various changes and adjustments are very frequent. We have seen a lot of fresh capital or innovation pouring into the world, bringing various experiments. Let us wait and see how things develop.
Two suggestions
Ganesh: I want to leave the audience with two thoughts. The first one is, Covalent has about 60,000 developers. Infura probably has about 500,000 developers. So Covalent has about 10% of the people that Infura has. GitHub has 30 million developers, and Covalent has 0.1% of GitHub. We are still in such an early stage, everything is just beginning. The second point is, in the bull market, people will think, should I invest in meme coins? Should I invest in LRT, LST? I would say that the biggest investment you can make is to invest in yourself, invest in your knowledge, research, and belief. If you believe in yourself, then you should back yourself more firmly. In my limited experience, those who have done this have done well for themselves. So I want to convey this message to our community and our audience.
Blair: That's so true. Thank you so much for sharing everything, it's so fulfilling.
Ganesh: Thank you so much for the great work you do, and I think we need more sincere builders and people with strong convictions. If the listeners haven't had a chance to read it yet, please read the English and Chinese translation of that study, it's very extensive, detailed, and goes very deep. Thank you so much for all you do for the industry.
