FRST.io Aims to Revolutionize The Way We Track Crypto markets [Interview with Karl Muth]
I got the chance to interview Karl Muth, CEO of FRST.io. FRST.io makeS enterprise grade, trading-desk-ready crypto software. Using their software, a trader can track large and subtle movements of crypto into various wallets and exchanges to get insight into which way the markets are moving. You can also tune your algorithms with their expansive data sets, which include annotated information back to block 1.
Karl holds J.D. and M.B.A. degrees, the latter with a concentration in economics from the University of Chicago, as well an M.Phil. and Ph.D. degrees from the London School of Economics. The founders of FRST brought him in as CEO earlier this year; prior to this, he was CEO of Chicago-based search engine startup Haystack, whose technology helps users find content on music, podcast, and video platforms.
FRST’s co-founders, Jonas Frost and Patrick Gorrell, decided to build FRST.io because they saw that there was an incredible amount of valuable data in identifying and annotating the relationships between traders, nodes, mining sites, and other locations on the blockchain but no one was bringing it all together and making these connections available to traders in an actionable format. Jonas and Patrick wanted to answer some simple queries:
How are the whales moving?
How are the exchanges reacting to each other?
What are the ICO’s doing with their ETH?
So, they built a platform to generate insights and then act on them. Here is the transcript of the interview. Enjoy!
Karl Muth: I'm Karl Muth. I'm a CEO of a startup called FRST. We're based in LA, and we make enterprise grade, trading-floor ready software. When I say "trading-floor ready software," I mean what people need in order to be informed traders on trading floor that primarily trades crypto or digital assets or on a multi-asset-class trading floor that has a substantial crypto operation.
Karl Muth: We work with trading desks that are transitioning to crypto. For instance, you might have ten traders on foreign exchange trading and two or four of them have recently begun trading crypto, all the way to early adopters of crypto trading who may have been trading tokens since 2014 or 2015.
Pat Larsen: Okay. Cool.
Pat Larsen: Do you also track transactions across the blockchain?
Karl Muth: We do. One of our functions is historical research, and we recognize anyone building trading algorithms or anyone doing serious research on trading requires good historical analysis. The function of historical research is handled on the platform through tracking every transaction on the ERC20 network, allowing people to query those transactions, and then also allowing people to see in a graph database format the relationships between one wallet and another wallet, one node and another node, a fund and its mining operation, for instance. These relationships are incredibly important because they allow people to recognize who on the blockchain is related and distinguish related transactions from arms-length transactions.
Karl Muth: A great example of the importance of knowing whether wallets are related is wash detection. So, often, you'll have a series of traders who might be affiliated or even a small exchange who want to manufacture volume in a given token, they want their token to look hotter than it is. Unless you recognize that those people are related to each other, your trading algorithms can easily be fooled into thinking that the volume in a given token has amplified 2X or 4X during a given trading day.
Pat Larsen: Okay. Can you see the trades inside an exchange?
Karl Muth: Trades inside an exchange are opaque to us, currently. However, as people move to full disclosure, distributed exchanges we will be able to see relationships within those exchanges. On ERC20, we are actually be able to see whether a party to a transaction was a valid address for a given exchange and whether something occurred inside or outside the walls of the exchange, which is exciting.
Pat Larsen: Okay. This trading platform, does it reach into seeing how utility tokens are used or is it just purely on the capital market side?
Karl Muth: This is important to emphasize. We track every message ever sent, every transaction ever committed, and every token ever moved on the ERC20 network. What I mean by that is we have every time someone has transferred ownership of a cryptokitty, we have every time someone has made an transaction on the network that may not necessarily have dollar value, and we have, of course, trading activity. To the extent that spot prices are available for any given token, we provide them and we position them correctly on the timeline. To the extent that a token is non-fungible or doesn't have a dollar value, we alert the user to that fact. The user can exclude non-fungible tokens from the query, compare tokens against each other, or examine the same token’s performance during different periods on the timeline.
Pat Larsen: Okay. With Bitcoin maybe moving someday to new networks and perhaps building on that platform, would your protocol be able to watch those transactions as well?
Karl Muth: So, each network has unique monitoring challenges, but yes. Our goal is to have a unified customer experience where a trader can be functionally agnostic in a research task and ask a query like, "Show me all the wallets that have ever had a million dollars in them" and have an easily interpreted, easily actionable output from that query where it doesn't matter which networks you're being dealt with, which tokens you're being dealt with, and so on. I’ve actually included that query here for our ERC20 network records.
Karl Muth: What I've done here is formulate a query asking, "Show me all of the wallets on the ERC20 network that have ever had at least a million dollars in equivalent fiat value within them." We run this query, and we find that about half a million wallets qualify as a valid result for that query. Now, we can dive in further and we can say, "How many of those have ever visited the network from an IP address that appears to be within the United States?" We can ask a question like, "How many of these million dollar plus wallets have remained constantly at a value of a million dollars for at least a year?" And we can see how they're related. We can ask a query like, "Show me all the wallets with a dollar value over $10 million that have had a direct transaction with one another."
Karl Muth: This allows traders to have much better situational awareness as they're engaging with counterparties on the blockchain.
Pat Larsen: Is your platform also doing trade execution?
Karl Muth: Currently we're developing functionality at the two ends of our platform. If you think of trading activity as discovery and then research and then modeling and then testing and then implementation and then execution, we're working on the two ends, which are discovery and execution. We're working closely with a partner who we'll soon announce on the execution piece, and we're working with a potential partner exchange on the opportunity discovery piece. We're excited to make those announcements, possibly as soon as in Q4 of this year.
Pat Larsen: Are you also issuing a token?
Karl Muth: We do have a token, and we have a token without an ICO, which we recognize is somewhat unique in the space. Our token is strictly a utility token. The way to think about our utility token is like a postage stamp. People on our platform who are paying for access to the platform are like people mailing letters and using the postage stamps. The speculators in tokens are like stamp collectors. It isn't that the stamps that you collect are no longer good for sending letters, it's that you believe that their value will go up to a level that you believe exceeds the utility you get from sending a letter.
Karl Muth: This is how we think about our utility token, and our utility token is very simple. It's an ERC20-conforming token that allows you access to our trading information. Another analogy would be think of it like a subway token where if you want to ride the subway, this gives you a temporary access. Our hope is to provide high value, high fidelity, high speed access to traders during the trading day, but also to enable them to perform research tasks that may be "slower tasks" that may use historical data. It may use a mix of data, and it may even require the trader to import proprietary data, which we allow.
Pat Larsen: Okay. Is there use to having more tokens as a trader versus just like one token?
Karl Muth: There is. It's a pay-for-access model, much like other services the typical trading floor currently subscribes to. We've done deep research with several of the top trading floors in the space, and over and over again, we've been told what they don't want is a complex new billing regime. What they do want is a billing system that conforms to things that they're familiar with and looks like tools that professional traders already use. This is true from UX to UI to billing. Conforming to this, our behavior is in-line with other financial services companies that allow a mix of services from real time, high service level or high-frequency traders, all the way down to research and archival levels of service where perhaps you just need to run a back-testing model on archived data from last year. Obviously, that doesn't require the highest-level service.
Karl Muth: We scale our pricing to reflect the needs of our customers, from a high-frequency trading bot that might require constant 200 millisecond service and “five nines” uptime all the way down to a junior summer associate who is performing a research task on some mixture of our data and your proprietary data from November of 2017.
Pat Larsen: With crypto, you kind of have to have a 24/7 offering now, right? Kind of a global market that's on all the time?
Karl Muth: I think that's right or at least that's the direction of the market. However, many of our customers do run 9 to 5 desks or traditional three-shift desks. We want to support them in a way that makes sense from an operations standpoint, as well as a cost standpoint. We allow hourly access. If you're a 9 to 5 desk, you're only paying for 8 hours of access during the day. If you're a human-operated desk, you can deal with more latency, for instance, than a fully-automated bot would tolerate. We also support 24/7 desks. Among our beta customers, we have several 24/7 desks, which we fully support whether it's mid-day, midnight, or the weekend.
Pat Larsen: What's a research task I can do on your platform that's hard to do on other platforms?
Karl Muth: A great example of a task that's really hard to do, even on other platforms that are aimed toward professional customers, is understanding a transaction or event in terms of the parties who are involved. An example would be running event analysis on a series of liquidation transactions.
Karl Muth: Take the recent [EOS-related] ETH set of liquidations as an example. There are really too many counterparties involved in that transaction for you to individually query those wallets and learn much. Even if you invested an entire afternoon surfing Etherscan, there's no way you would really get a picture of how the wallets were related or how much real volume was involved.
Karl Muth: Conversely, if you start with the EOS wallet, you see all of the tokens flowing out and you see the EOS folks being rewarded with ETH, but you really aren't sure at what volumes those transactions occurred or precisely when during the liquidation event. We let you build real-time and historical graphical representations of market events, then interrogate each transaction within that period of market activity, and then perform robustness testing on your models to see how your trading model would have performed during that event.
Karl Muth: Then we allow you to query the event itself as a window of time and understand which market participants were most active during the event and what market activity occurred during the event that was abnormal or unusual. You can see our interactive example graphic here, at https://frst.io/map.
Pat Larsen: Okay. When are you planning on launching the platform?
Karl Muth: Our target launch window is Q1 of 2019, and we believe we have a great mix of partners and investors who can push us toward that date and inform the initial offering in terms of features and functionality. We're in the position of having more than half of our first round of funding come from customers and potential customers, which we believe creates a really good dialogue around the shape the platform should take and what key features are “mission-critical” versus “nice to have” on launch day.
Pat Larsen: When's the token launching? Is it the same time as the platform?
Karl Muth: The tokens exist today, and are simply being used for testing on the platform. There will be tokens pre-sold to trading floors and qualified customers, and that's part of our business development process during Q4 of this year.
Pat Larsen: It seems like centralized exchanges are the dominant mode of trading now. Do you see that changing going forward?
Karl Muth: I think there are three issues with exchanges today. The first is the costs are substantially higher on exchanges today than we see in other types of trading, be it equities, foreign exchange, commodities. The cost structure needs to change ... if not in a fundamental way, in a significant way.
Karl Muth: The second problem is that the exchanges themselves often are not efficient among each other in terms of spot prices - to an extent where significant pricing arbitrage exchange to exchange is possible throughout any turbulent trading day. I think we'll see higher degrees of market efficiency there. We're already seeing that. I think that's a trend that will continue.
Karl Muth: I think the third point is that any exchanges, especially minor exchanges, are not well-equipped to deal with the increase in trading volume that we anticipate - that many of the exchanges that currently have a market-making function are going to have to decide whether they want to be pure exchanges, like Bittrex, or whether they want to continue to have a market-making function that may not be large enough to survive in a higher-volume world.
Pat Larsen: Do you think the constraints of Bitcoin or ERC20, in theory and protocols, limit the functionality of exchanges and trading? Do you think the industry would eventually move to a more efficient protocol?
Karl Muth: I think you're already seeing many good suggestions for what V3.1 block chain will look like, and what will come after ERC20. There are probably a number of painful forks for major tokens between here and there, and we anticipate that network speed will increase significantly but not geometrically over the next two years. The reason for that is the amount of in-place hardware you need to geometrically accelerate network speed is not cost-prohibitive by itself, but not cost-attractive, either, to the people who would bear those costs. In other words, the people building the raw infrastructure don't see those investments as unusually-attractive and there are other places they can deploy capital.
Pat Larsen: Do you get the feeling that there's a lot of institutional money on the sideline waiting for more regulation and custodial tools and those types of things?
Karl Muth: I do. I think people are waiting for regulatory certainty more than regulatory quantity.
Karl Muth: We've been in close discussions with people in Washington, in London, in Brussels, and elsewhere who are interested in, and active in, the regulation of professional trading floors. I think it's in everyone's interest to create a set of tools that make traders more able to trade and less worried about the regulatory environment in which they're trading. One of the things we’ve tried to do at FRST is build tools that are sensitive to and aware of the regulatory environment, much like the tools you have in commodities and in FX, where traders don't have to become lawyers to be effective traders.
Pat Larsen: It seems like certain countries are competing to be the most inviting regulatory environment to attract the capital from crypto. Do you think these efforts are going to be successful in the short-medium term? It seems like the crypto valley came and went already.
Karl Muth: I think these efforts at some global federalism around crypto are hugely valuable in that countries should compete with each other to attract high-quality investment and attract high-quality talent and attract a high volume of transactions. Crypto allows them to attract all three of those with a single asset class.
Karl Muth: The real question is whether there are upper bounds on how many people are willing to physically relocate their businesses to some of the jurisdictions involved. Getting people to move from West Palo Alto to Estonia is non-trivial ask for a senior employee. The same is true of a number of the other jurisdictions we're talking about.
Karl Muth: Meanwhile, I think there's enormous opportunity for places that are already relatively liberal financial centers to rotate toward crypto and retain many of their top traders, top quantitative analysts, and top investment bankers. For instance, if you're relatively indifferent as a trader whether you're trading heavy metals, currency, or crypto, and you already reside in Hong Kong or Singapore, the switching costs to move you from that desk to a crypto desk, for both you and your employer, is very low.
Pat Larsen: You’re also a public policy expert and taught law at Northwestern. It feels like people don't talk about what happened at Liechtenstein and Swiss Banking enough. Do you think that the EU and America would kind of lean on Malta or Singapore in the future if crypto becomes a huge global asset class?
Karl Muth: I think it's already happening, and it's happening quietly. Soft power stuff. I think the influence of the U.S. on some of these financial centers that perhaps don't have as close diplomatic relationships with the U.S. will be challenging. I think the model that isn't studied enough, and I agree with you about Switzerland and Liechtenstein, is Mauritius - that’s not studied enough.
Karl Muth: Mauritius has been a center of activity for the Middle East, Africa, and parts of subcontinental Asia for a long time. They have a twelve-billion-dollar GDP and 1.2 million people - that’s about the size of metro Dallas or, for New Yorkers, it’s less than half the size of Brooklyn. It’s not that many people as a denominator for that GDP number.
Karl Muth: Mauritius is sort of the Grand Cayman of that part of the world. Despite this, Mauritius is a governmentally stable, functioning economy that exhibits few, if any, of the characteristics that many government officials claim these crypto enclaves will suffer from. It has a functioning civil service. It has tax collection mechanisms that are largely effective. It has functioning infrastructure. I think we now have nearly a century of evidence that you can be a niche player in the global market that is inviting to and supportive of the financial sector and also be a functioning economy in other respects - that’s the postwar story of Hong Kong, really.
Pat Larsen: Anything else people should know?
Karl Muth: I think that’s a good basic summary of what we’re doing. People can follow me on Twitter at @KarlMuth, and if people want to follow up, they can reach out to us with general questions at firstname.lastname@example.org, or me directly at email@example.com. And, of course, we’re always looking for devs to join our team and would love to hear from them at firstname.lastname@example.org.