In our latest project deep dive, we take a close look at Covalent, the unified blockchain API. Covalent leverages big-data technology to create meaning from hundreds of billions of data points, delivering actionable insights to investors and allowing blockchain developers to allocate resources to higher-utility goals within their organization.
Let’s dive in:
1. To begin, what is Covalent and what problem does it solve?
Covalent is the only multi-chain API that provides every single point of on-chain data. This includes granular, historical, and blockchain metadata. Blockchain technologies can change the world, but this potential is left unfulfilled if the data is not accessible. Despite the proliferation of digital assets on the blockchain, granular and historical blockchain data is impossible to access by anyone but the most sophisticated and technically talented. Querying blockchains directly is time-consuming and compute-intensive, while additionally refining and manipulating the data adds another layer of complexity.
Current solutions require developer hours to write additional code to query granular and historical blockchain data. Developers need to be retrained and understand the complex tools (for example, how to write a subgraph), which can take weeks or months to implement. This is expensive to adopt and slows down the mainstream adoption of blockchain technologies. Covalent is committed to creating the simplest solution possible for developers – no extra code needed, just one API call.
Ultimately, Covalent’s vision is to empower the pioneers of tomorrow by providing the richest and most robust data infrastructure for the entire blockchain ecosystem. Covalent does so through a single, unified API.
2. What type of users rely on blockchain data to dictate their decision-making? Can you describe your target customer?
It is important to remember that Covalent is an API and requires a developer to integrate the product rather than an end-user consumer-facing product. In that regard, it is like Stripe or Twilio.
Covalent’s target customer persona is growing in three buckets:
- First, there are the crypto natives. These are developers building DApps or working for enterprises adopting blockchain technologies. The majority of our customers belong to this bucket today.
- The second bucket is regular fintech companies offering crypto products to their existing customers. Every single fintech company is today thinking of their crypto strategy – especially those companies catering to millennials and gen-z. These companies lack in-house blockchain expertise and are looking for a turn-key API solution to shorten their time to market. We have a growing customer segment that belongs to this bucket.
- The third bucket is companies that have nothing to do with crypto or blockchains – just regular companies that happen to accept crypto as a method of payment. These companies will need to instrument their balance sheet holding the digital assets and will require a solution like Covalent.
3. Given that blockchain data is freely available, why is it still difficult for companies to access and analyze it?
This comes down to a number of factors. In theory, blockchain node software already has the blockchain data, with a handy JSON-RPC layer to pull out the data. However, there are four problems:
- Expensive: Accessing historical Ethereum data is cumbersome and expensive, and requires a blockchain node to running in a special configuration known as “full archive node” which currently takes up hundreds of gigabytes of storage space and has other special hardware requirements.
- Slow: The JSON-RPC interface is known as a “point-query” interface, i.e., you can only ask for a single object (block, transaction, etc.) at a time. What you need is a way to batch export the data, which means completely rethinking the JSON-RPC layer.
- Incomplete data: The most interesting blockchain data is actually the data structures inside the contract state. However, these are not visible even on a comprehensive tool like Etherscan. It’s currently too hard or simply impossible to reconstruct these data structures through the JSON-RPC layer.
- Too niche: Hundreds of query languages have come and gone over the years, but nothing has stood the test of time like plain old SQL. SQL has been around for 40 years and will be around for the next 40. It’s the Lindy effect in action. A niche query interface is a blocker to mainstream adoption. We need SQL for mainstream adoption.
4. Can you describe the Covalent API and DeFi SDK? Why was it critical to have a no-code approach to your API?
The Covalent API is a simple REST API to pull out token balances, positions and historical transaction activity across seven different blockchains. It’s the same API across blockchains; for example, it’s just one character change to move from Ethereum to Binance Smart Chain or Avalanche.
The biggest scaling bottleneck with crypto right now is talent. The more leverage we can give a developer in shipping product features and solving customers’ needs, the faster this industry will grow. That is why we emphasize a “no-code” approach and have an explicit product strategy for developers to use the product from the browser – without writing a single line of code or downloading anything.
Our DeFi SDK includes Primer, an in-house transformation language inspired by the MongoDB query language. Our APIs are extremely rich and return a lot of data catering to dozens of use-cases that may not be needed for a particular use-case. With Primer, developers can select just the fields that they want and further aggregate the data to suit their needs. All of this is done at query time in real-time instantaneously.
5. What are some practical use-cases of the Covalent API that are available at this given time and who is using them?
Access to raw blockchain data is akin to having access to raw ingredients such as tomatoes and pasta, giving an infinite amount of possibilities. It’s up to the chef on whether they want to make lasagna or risotto, or anything else.
The bulk of the use-cases are as-of-yet unknown, and we are constantly surprised at the multitude of ways our current customers use the data. Here are some current use-cases:
- Taxes: Every single DeFi action is a taxable event and having access to this data helps firms be compliant. If a trader uses Coinbase, they can quickly download a CSV of their trade data – besides Covalent there is no such thing for a decentralized exchange like Uniswap or 1inch.
- Wallets: There are over 200,000 ERC20 tokens on Ethereum and this number is growing exponentially due to the composability of DeFi protocols. Wallets such as Zerion use Covalent to show real-time and historical balances, positions and portfolio value for all of their assets.
- NFT Dashboards: Investor tools to show price trends, liquidity and ROI of collectibles. Products like NFTX and Chainguardians use these Covalent features heavily to educate their users better.
6. The blockchain analytics sector is evolving rapidly. There is a growing number of companies, like Coin Metrics, Dune Analytics, Glassnode, and Flipside Crypto providing institutional-grade data collection and processing systems of blockchain data across exchanges, assets, and markets for analytics queries. What differentiates Covalent in this competitive market?
There are three major differentiating factors:
- Covalent is an API for developers building blockchain products. It is an enabling technology for other products. A regular consumer or retail user cannot immediately use the API. Many of the projects mentioned are end-user facing with dashboards, etc.
- Covalent is building a decentralized public utility and will be hosted by validators across the world. We foresee a future where many other projects will use Covalent for their backend architecture because of its unstoppable nature and cost-effectiveness.
- Covalent is ultimately a marketplace for blockchain data to meet various use-cases. As such, we do not prescribe what the use-cases are – we simply provide the tools to solve the use-case at hand.
7. Large players in DeFi are increasingly agitated with scaling issues and high fees on Ethereum. Some projects are choosing to sidestep Ethereum from the get-go and instead work with platforms built by Solana, Algorand, NEAR, and others. In 2020, for example, Compound moved to create its own chain and FTX chose Solana for Serum. How do you see this trend playing out in 2021, and what impact will ETH 2.0 have on addressing some of these issues?
We came up with the name “Covalent” – a term in chemistry that bonds together – in anticipation of the multi-chain future back in 2017. We are going to see a rich and vibrant ecosystem of blockchains in the near future, though it is too early to say what will be the winning combo.
Our experience comes from the database market – where over the last 30 years you have had multiple, multi-billion databases like MongoDB, Elasticsearch, Oracle and dozens of others all very successful and have their specialties. We see strong parallels here. The future is multi-chain.
We think there will be more than one winner in this market. The first scaling technology to have direct withdrawals from a centralized exchange will be anointed as one of the winners. We can already see this is the case with Binance adding support to Binance Smart Chain.
ETH 2.0 is an amalgamation of various ideas like sidechains, rollups and other scaling techniques. We think of ETH 2.0 as a set of ideas to rally the community rather than a specific target. The release of ETH 2.0 will only speeden the multi-chain future.
8. What is the inherent value and use case for Covalent’s native token, CQT?
Firstly, CQT is a governance token. CQT token holders vote on proposals to change the system parameters such as new data sources, specific geolocations and data modeling requirements.
CQT is also a staking asset. Validators will earn fees for answering queries. Validators stake CQT and pledge to meet minimum Service Level Agreements. Validators that fail to maintain their uptime will see their CQT tokens reduced. Users of the network, active participants in the community, and/or holders of CQT receive CQT incentives. CQT will be used to incentivize the creation of the long tail of use-cases of apps using the Covalent Network’s database. Smallholders of CQT can delegate their CQT to validators.
9. What do you think have been the biggest roadblocks to Dapps achieving mass adoptions?
There have been three significant roadblocks:
- The user experience is still janky. Trying to remember seed phrases and looking up transaction hashes is not very friendly. Products like Argent are making a difference in this space today.
- Education. The end-user does not fully appreciate the values of decentralization and self-custody and therefore considers these features as adoption blockers.
- Gas. DeFi is still a whale’s game. Sixty dollars for a swap on Uniswap is not feasible to onboard the next million users.
10. What crypto trends are you most excited about in 2021?
There are lots of trends to be excited about in 2021:
- DeFi continues on its accelerated growth trajectory with no slow down in sight. There will be more experiments in the horizons and with scaling technologies being shipped, more investors will enter the space.
- Newer use-cases like social tokens and NFTs have worked their way into the zeitgeist with faster user traction than DeFi.
- The merging of DeFi and Fintech continues and these two types of organizations will be indistinguishable in the near future.
- The true digitization of assets like invoices. These are digital replicas of analog processes and with digitization, any asset that can be tokenized will be tokenized. Imagine a future where your accounts receivables/payables are tokenized and can be swapped on Uniswap or put down as collateral for a stablecoin loan.