Once defrauded for ten thousand kroner, this VC builds a crypto security vault

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One of the barriers to bringing cryptocurrency into the mainstream is the frequency of fraud in the space. Last year alone, over $3.9 billion worth of crypto was “lost,” according to an industry report, even though the number was already down roughly 50% from the previous year.

Francois Le Nguyen, an angel investor and former CEO of Entrepreneur First, is among the victims of crypto scams: in a phishing attack on Discord, he lost $10,000 worth of Ethereum and NFTs.

If even astute investors like himself and notable NFT figures like Kevin Rose are vulnerable to wallet hacks and scams, everyone else is vulnerable,” Le Nguyen told TechCrunch in an interview.

“The motivation is to prevent my family members, my friends from getting screwed because I know one of them will eventually get screwed,” he said. “Even though we talk about owning your own keys as the next wave of how you should manage your assets, if you don’t have the tools to protect yourself, disasters will happen, because every single thing you interact with can be a potential . threat, which is so scary.”

The distressing loss prompted Le Nguyen to develop security solutions for crypto transactions with the help of his co-founder Jake Harwood, an effort that eventually became Staging Labs. Today, the startup, which currently has three full-time employees, announced that it has raised $1.1 million in an oversubscribed pre-seed round.

“Recent events in the US banking industry are a reminder that there are regulatory and systemic safeguards that we often take for granted in TradFi [traditional finance] world,” said Kabir Kumar of Flourish Ventures, an investor in Staging Labs. “These protections have yet to be built in the crypto world. Individuals are expected to fend for themselves, especially against scams and fraud.”

This is where Staging Labs comes into play. Initially, the startup aimed to create an “SOS button” for crypto transactions, similar to a credit card’s freeze option. But it soon realized the limitations of this approach – what if a user is away from their device? It repeated the concept and came up with a more advanced version called Saferoot that can actively and automatically scan transactions 24/7.

In a malicious attack, Saferoot works by automatically transferring digital assets from a vulnerable wallet to a backup. This is done by intercepting a transaction after a user clicks “send” but just before the money goes through.

“Blockchain technology is seen as immutable, or you can’t change it after you click ‘verify.’ ,” Le Nguyen explained.

Saferoot does not predict or detect malicious attacks by itself. Rather, it sounds an alarm when a transaction exceeds a user’s defined limits, similar to how people protect their credit cards by adjusting their spending limits. However, over time, Le Nguyen wanted the risk monitoring part to become “smarter”.

When Saferoot detects a suspicious transaction, it shoots it down and sends another transaction instead of moving the asset before the hacker can steal the funds. This technique is not particularly new and has been used by arbitrage traders, Le Nguyen pointed out. But he argued that the company’s moat lies in sending a transaction within a short time, which is “a very, very difficult distributed system problem.”

“That’s where my co-founder’s background comes in,” noted Le Nguyen, referring to Harwood’s experience building a network-distributed system for speaker manufacturer Sonos.

The stage where Staging Labs currently intervenes is called the “in-flight” part of a transaction. In the long run, the startup plans to also target pre-flight, which is before a user initiates a transaction, and post-flight, which typically involves recovering funds and may require the intervention of law enforcement. The company is already in talks with partners to develop capacity for the last two stages.

Although Saferoot appears to be a SaaS solution, it takes a slightly different route to monetization. Recognizing that fund protection is an important part of asset transfers, the company plans to charge users a subscription fee and a percentage of assets recovered.

It will also share revenue with wallets, which act as key service distribution channels in the crypto world but often struggle to generate revenue themselves. It is currently in talks with “dozens” of wallets and is approaching partnerships with one player.

Staging Labs’ latest funding is a “party round,” which is common for young crypto startups seeking partnerships and during a bear market when investors are more reluctant to lead. The lineup includes The General Partnership, Flourish Ventures, NGC Ventures, AlphaGrep, Gaingels, scouts from a16z, Kleiner Perkins, Greylock, and crypto founders and angel operators from ConsenSys, Coinbase, Anchorage Digital, Chainalysis, Quicknode, Merkle Science and more.