Stelo Labs Talking idly on paper kills people. We made three fatal mistakes.

Stopping Senseless Chatter The Deadly Consequences of Careless Communication at Stelo Labs

The Web3 security company Stelo, which was previously led by a16z, terminated all its products on October 31st. According to the RootData page, Stelo completed a $6 million seed round of financing on February 16th of this year.

In October, the company posted an announcement on its official website, explaining the three reasons for the failure of its products. Here is the full text of the official announcement, translated by ChainCatcher:

We have made the difficult decision to terminate all Stelo products on October 31st, 2023. This includes the Stelo extension, stelo.com, approvals.xyz, and the Stelo API. This decision was extremely difficult, but we want to ensure the safety of all users and protect them from future phishing attacks. To this end, we recommend that all users immediately download one of the following products: Pocket Universe, Fire, or Wallet Guard.

When we started developing Stelo, our vision was to solve technical and design challenges in the areas of security and usability. We believed that the most pressing issue was preventing users from being deceived or falling into phishing traps. Therefore, we decided to focus on ensuring transaction security and making it easy for users to understand.

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By becoming an integral part of the transaction flow, we believed we could develop a product ecosystem that includes an MPC wallet, fiat on/off ramp, API products utilizing the fraud/phishing data we collected, and DAO voting tools.

From a numerical standpoint,

we achieved the following:

• Over 10,000 downloads of the Stelo extension.

• 1,500 daily active users and 7,000 monthly active users (despite not developing or marketing products in the past six months).

• We protected wallets holding over 200 million dollars in assets.

• Our platform prevented hundreds of scams, saving users from potential disasters.

In addition to our extension, we also developed an application programming interface (API) for wallets, bringing together our transaction risk engine, token approval website, and a generic interface for interacting with any smart contract.

However, after a year of building the Stelo product suite, we realized that some of our assumptions were either unfounded or not applicable to the early stages of a startup.

Assumption 1: Transaction security has data network effects

Our view was based on “data network effects,” which means that the more users we have, the more attacks we see, and the stronger our system becomes at detecting and blocking attacks, thus attracting more users. We particularly relied on off-chain network effects, where data about websites and URLs are crucial. Only products that are part of the transaction flow can access this data and see which websites malicious transactions originate from. It turns out that by simply looking at the transaction payload (LianGuaiyload) and applying simple heuristic algorithms, most malicious transactions can be detected.

We recognize that when there is evidence to the contrary, we should not simply believe our own narrative. We believe in the existence of network effects, but we should not confuse the potential long-term effects with the short-term reality. This network effect may still play out to a certain extent (almost all fraudulent networks have this effect), but we have not reached that scale yet.

We also recognize that competition is prepared for losers. In a market without barriers, without strong network effects, and filled with competitors, no one is a winner. We need to formulate effective strategies to avoid competition and identify markets.

Assumption 2: Each cryptocurrency user uses an independent wallet

We use the cryptocurrency adoption rate metric because we believe that all transactions require security. This assumption means that all transactions will be carried out through dedicated wallets. However, many promising cryptocurrency use cases – gaming, decentralized social networks, and stablecoins – are likely to have embedded wallets that abstract the complexity and risks of using dedicated wallets from users. If users do not directly use wallets and do not face the risk of phishing attacks, our product portfolio does not add any value.

We have learned to clarify our assumptions and question them when new evidence is discovered. We believe that our approach has “mitigated” the risks associated with the largest use case form of cryptocurrencies. Although we know that we are betting on the competition between independent wallets and embedded wallets, we have not really focused on the issue and found its true implications. If we have truly thought about which solution developers would choose for each product, we might have taken a different approach or chosen different problems to solve.

Assumption 3: Consumer adoption of cryptocurrencies is imminent

Most importantly, we believe that mass consumer adoption of cryptocurrencies is imminent. We are still excited about many cool projects, but cryptocurrencies are not yet mainstream. AAA-grade crypto games or decentralized social networks may experience explosive growth soon, but the Stelo product portfolio does not provide many benefits to these users and cannot profit from this growth. Importantly, we do not believe that our current users can represent the incoming wave of new users that we anticipate with wider adoption. Without feedback from “the right users,” we feel like flying in the dark with no direction.

We recognize that we need to focus on important end-to-end issues. On the surface, we are concerned with the problem – protecting people from fraud. However, based on experience, our user base is primarily involved in gambling and speculative activities, which means that if we truly think about end-to-end user issues, it is helping people with gambling and speculation, but that is not the problem we want to solve. We don’t need to solve the entire problem from the start, but we should understand the entire user journey and ensure that we help users solve important andongoing problems.

Moving forward

We will start rebuilding and engaging with users. In the process of developing the next generation of Stelo Labs, we will keep these lessons in mind. We will dare to question our own narrative, focus on finding the right market, list various assumptions, and focus on end-to-end user issues.

We will continue to update Blocking; if you have any questions or suggestions, please contact us!