Crypto risk management platform Chaos Labs Inc. raised $20 million in seed funding Tuesday in a round co-led by PayPal Ventures, the venture arm of payments giant PayPal Holdings Inc., and the investment management firm Galaxy Digital.
Notable crypto companies and investment firms also participated in the round, including Coinbase Ventures, Uniswap, Lightspeed, OpenSea, Polygon and Hashkey, among 23 organizations and six angel investors.
Chaos Labs’ platform protects decentralized finance protocols against risks such as malicious attacks with preventive measures and monitoring through an automated system that uses proactive simulation. It does this by offering processes that test inputs and outputs based on how the underlying systems operate and simulate scenarios based on attacks and events that could occur in the wild. Then the platform suggests mitigations.
Decentralized finance, also known as DeFi, is a type of financial technology based on decentralized blockchain ledgers that use peer-to-peer token transactions and self-executing smart contracts to avoid intermediaries such as banks for basic and complex financial services. Using DeFi protocols, developers have created decentralized economies that allow people to create token exchanges, savings accounts, interest-bearing loans, securities, market indexes and more.
“As the world moves from the opacities of traditional finance to a more open DeFi system, financial risk management must advance accordingly,” said company founder and Chief Executive Omer Goldberg. “At Chaos Labs, we believe that every DeFi protocol must regularly conduct robust risk testing to verify and validate that their economic system is secure against hackers and unanticipated volatility.”
DeFi protocols have proven particularly vulnerable to exploits and hackers, according to a report from Chainalysis. DeFi protocols accounted for $3.1 billion in losses during 2022, 82% of all cryptocurrency stolen by hackers during that year, up from 73% in 2021. The same report suggested that protocols should be tested with simulated attacks and hacking scenarios to harden them.
Since its founding in October 2021, Chaos Labs has partnered with major DeFi industry clients, including DeFi lending platform Aave, yield-generating platform BENQI, crypto swap platform Osmosis and trading platform dYdX. The platform’s risk engine is currently deployed on Aave V3 for risk optimization and mitigation to educate the community on risk-related decisions.
“As crypto development accelerates and the landscape grows in complexity, so does the range of potential exploits and hacks,” said Amman Bhasin, a partner at PayPal Ventures. “Chaos Labs addresses this by arming protocols, investors, and users with a suite of risk management and optimization tools to protect against these vulnerabilities.”
PayPal’s own interest in crypto has developed over the years beginning with the payments giant allowing users to buy and sell cryptocurrencies from their own accounts in 2020. Later the company acquired the digital asset startup Curv Inc., the developer of digital asset security infrastructure technology. Last year, the company also unlocked the ability for users to transfer their cryptocurrency off the platform and into their own wallets.