Detecting and Predicting Price Manipulation and Fraud in Digital Assets: Why CoinFund Invested in Cloudburst
Co-authored with Isaiah Washington
In crypto’s nascent history, participants have experienced numerous hacks, scams and losses. Blockchain technology is hardening, but it’s still early and the learning curve to stay safe is steep. While crypto networks are focused on seamless and instant execution of transactions, the coordination of builders and users largely takes place off-chain, inviting risk with each human layer that is added to the process. With the 2022 self-inflicted implosion of CeFi, including FTX, Blockfi, Celsius, Voyager, Genesis and 3AC, it’s very clear that crypto has a people problem. These trusted counterparties sought to promote the adoption of crypto assets without the infrastructure to help access networks safely and securely.
In order to solve crypto’s people problem, three things need to happen. First, users must retain control over their assets even when interfacing with counterparties and service providers. Second, developers must focus on completing the decentralized application developer stack. Third, we must be able to analyze, monitor and target illicit activity in order to stop and hopefully prevent future incidents. The ecosystem is working hard on #1 and #2 but #3 is a major market opportunity. Many of the cyber monitoring products are not generating viable automated intelligence because they analyze stale data. By the time an action is committed on-chain it’s too late to be useful information; the protocol hack has occurred, the liquidity is gone and the rug pull is complete, or the funds have been mixed with no way to connect the endpoints and recover what’s been stolen. We believe addressing the white space between on- and off- chain coordination is critical to crypto’s advancement.
Enter Cloudburst, a threat intelligence and cybersecurity company building data API products that provide comprehensive and structured social metadata to target suspected market manipulation and manipulators. Cloudburst’s intelligence products collect, structure, analyze and deliver data that is relevant for monitoring, detecting and predicting price manipulation and fraud in the digital asset market and beyond. Existing blockchain intelligence and monitoring solutions focus exclusively on on-chain activity and forensics, ignoring a major opportunity to analyze conventional web2 data that can signal on-chain fraudulent and manipulative activity and the people who orchestrate it even before it happens. Cloudburst fills this gap.
Price manipulation, fraud, and vulnerability exploitation are some of the main problems blocking the safe mass market adoption of crypto by institutions, enterprises, consumers and regulators. Well lit and transparent markets will significantly increase the likelihood of regulatory compliance. As mentioned in our February 2023 Web3 Security piece, in 2022 alone, over $3B in cryptocurrency was stolen. Additionally, research has shown that over $120B in annual trading volume, or ~1% of total annualized crypto trading volume, is attributable to “pump and dump”-based cryptocurrency price manipulation, a dynamic also on the mind of regulators in the US (CFTC) and EU (MiCA), and driving requirements for good actors to purchase related monitoring tools in order to shine a light on bad actors and root them out. If you knew there were a manipulation scheme behind an asset you were interested in owning, would you buy it? Would you allow your clients access to it?
CoinFund is thrilled to announce that we have recently partnered with NYC-based Cloudburst Technologies by leading their Seed extension financing, immediately following a Seed round led by Strategic Cyber Ventures with participation from Coinbase Ventures, to support the continued development of the technology and its roll out to regulators, financial institutions and crypto platforms who intend to protect the interest of their customers and constituents. In the data analytics vertical, compliance has been the sweet spot as clients include anyone who help their users engage with crypto. It is a huge market and today, Cloudburst offers two main API endpoint products for clients with machine readable ambitions: (1) Realtime market monitoring and predictive analytics and (2) KYC/investigative search and attribution. CloudBurst’s first set of products identifies crypto tokens suspected to be pumped/dumped, exchanges targeted, price predictions and manipulation participants. They also forecast the accuracy and prospective scale of manipulation coordination efforts. The endpoints integrate with commercial enterprise and government systems; Cloudburst also plans to build its own UI/UX for customers in need of a platform experience. These products are driven by a fully automated and extremely robust data acquisition process that is scalable and real-time; the company taps into social coordination channels and groups across the deep and dark web in a variety of languages, including English, French, Russian, Mandarin/Cantonese, Arabic, Farsi and beyond.
Cloudburst empowers the public sector, regulators and intelligence agencies to identify and locate bad actors who manipulate prices, and help inform enforcement decisions and criminal prosecutions. Banks and trading platforms may now probabilistically demonstrate reduced risk of engaging with fraudulent actors and manipulation schemes. Trading firms will be able to utilize the proprietary data to inform investment decisions and also avoid venues or projects with higher historical risk of price manipulation via wash sales given the slippage costs of false liquidity.
Cloudburst is founded by threat intelligence industry veteran Evan Kohlmann, an exceptionally experienced and talented entrepreneur with a track record of developing automated systems for strategic and efficient data acquisition, distillation and intelligence extraction. Prior to founding Cloudburst, Evan founded Flashpoint from his bedroom in 2011, a leading cyber intelligence platform that grew to over 350 employees and was recently acquired by Audax. Evan is now applying lessons learned from his prior experience to the development of Cloudburst’s products and strategy to bring clarity and safety to the crypto markets.
Cloudburst is a first mover to build predictive threat intelligence products serving both public sector and financial use cases with prospectively large cost savings and predictive quantifiable event based odds. It uniquely covers both analytics and attribution. According to Future Market Insights, threat Intelligence in the traditional market represents a $11.6B market that is growing at a CAGR of 16.9%. Cloudburst’s immediately addressable global market is selling to governmental/regulatory organizations, financial institutions, and investment platforms. However, the applicability of Clouburst’s core technology expands beyond threat intelligence and into predictive data-based analytics, a market that is multiples larger.
For crypto to fulfill its destiny, web3 requires market structure transparency. Traditional solutions don’t go far enough to protect users while trading or storing everything from Bitcoin to their personal data. The legacy regime is encumbered with gatekeeping but if web3 can install its decentralized open standards there will be a massive need for surveillance and fraud prevention for a very, very long tail of new markets. Cloudburst is armed with a clear vision and exceptional experience to fill this void and aid in the evolution of the next generation financial landscape. At CoinFund, we are determined to make crypto ubiquitous and we are proud to back this exceptional company and founder that will help us get there.
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