In this episode, we talk with Ganesh Swami, the co-founder of Covalent, about the transformative potential of Covalent’s data infrastructure within the Web3 ecosystem. Ganesh provides insights into how Covalent enhances blockchain data accessibility and reliability, making it more competitive and efficient for developers and users alike. Covalent’s reservoir of structured data enhances decentralized AI training and inference, mitigating biases in AI models. He discusses the business model, scalability challenges, and the importance of long-term data availability beyond the challenge window. Ganesh also highlights Covalent’s competitive edge, their strategic decisions, and upcoming developments, including partnerships and the launch of a new token, CXT.

Audio-to-text conversion uses GPT, and there may be errors. Please listen to Youtube for the full podcast：YouTube

Brief Intro to Ganesh & Covalent

I’m Ganesh Swami, one of the co-founders of Covalent, which is a data infrastructure protocol. I started my career as a physicist working on cancer drugs and then pivoted from pharmaceuticals into data infrastructure. For about a decade, I’ve been building databases and data infrastructure before starting Covalent. Covalent is a critical project in the Web3 data industry. We’ve been around for five years, serving thousands of customers and partnering with over 200 blockchains to provide essential data services for the Web3 industry.

Covalent’s Business Model & Profitability

Covalent is a decentralized protocol, this means there are costs, expenses, revenue, and profitability, but there’s also an underlying tokenized business model. It’s important to understand that it’s not a traditional company. Fundamentally, the business model works this way:

The protocol indexes various blockchains and offers that blockchain data for access by applications. It’s primarily a developer API, a product for developers rather than retail users. Developers pay per query or per API call to access this on-chain data. These payments go into the protocol and are then distributed to the operators of the decentralized network for their services. This is fundamentally how the Covalent network business model works.

This entire process creates a flywheel effect. More data from blockchains unlocks more use cases, which attracts more developers. More developers lead to more applications, which generate more data, and this cycle continues. Over the past couple of years, we’ve doubled down on this approach. We started in 2020 with just one blockchain, Ethereum. Now, we have over 200 blockchains, and I believe we will reach 1,000 blockchains in the next few years. This is essentially how the business model operates.

The Importance of the Ethereum Wayback Machine

Blockchains function is more like billboards rather than databases. Imagine a billboard for advertisements. You post an ad for a few days or weeks, then switch it to the next ad, with no historical record or archival information of past ads. Similarly, blockchains are like billboards where you post transaction data. After a challenge window, which could be two weeks, the data is validated and then deleted. There’s no need to keep the transaction data, so it’s removed after a certain period.

This practice is seen in various facets. For example, data availability layers like Celestia allow you to post data for two weeks before it gets deleted because maintaining that data is expensive. Ethereum’s recent Deku upgrade introduced blob storage, where transaction data is posted to blobs and deleted after roughly 18 days.

The question arises: how do you retrieve transaction data beyond the challenge window once it’s deleted? This is an underexplored and overlooked problem in the space. The essence of blockchains is to have an immutable ledger that is secure and cannot be modified. However, a year from now, if you want to retrieve data from this immutable ledger, it’s often not available. This is a fundamental problem we aim to solve.

We’ve introduced mechanisms to ensure that transaction data remains available on the blockchain long-term, beyond the challenge window and typical data retention periods. The Ethereum Wayback Machine is akin to the Internet Wayback Machine. For those familiar with archive.org, you can input any website and see snapshots of it from years past. Similarly, the Ethereum Wayback Machine is a cryptographic mechanism that maintains all historical blockchain transaction data indefinitely. This approach addresses the issue that blockchains don’t naturally retain data long-term, providing a vital solution to this problem.

Blockchains, especially Ethereum, are undergoing significant improvements in scalability. Over the past decade, Ethereum blocks have become larger, block times have changed, and more operations are possible, leading to increased scalability. However, congestion with data on the Ethereum main chain remains an issue. This is why data availability (DA) layers were introduced. Celestia is one DA layer, but there are others like EigenDA, Avail, and NEAR’s DA layer. These layers essentially supercharge Ethereum, allowing more users, applications, and transactions to be processed. The goal is to reach a scale where most of the world’s transactions happen on-chain.

Currently, most crypto trades occur on centralized exchanges. Despite crypto being around for over a decade, blockchains are not the default for crypto trading due to scalability and user experience issues. DA layers dramatically increase Ethereum’s scalability, making it possible to process a high volume of transactions, similar to public networks like Visa, which processes 50,000 transactions per second. With these technologies, Ethereum’s capabilities are compounded, making it world-class. This is why this narrative is crucial for the current cycle.

Competitors and Covalent’s Advantages

Discussing competitors, Covalent offers a horizontal solution with various tools like the Gold Rush API, Gold Rush Block Explorer, and dashboarding tools, along with core infrastructure. One key competitor is The Graph, another major indexer. A significant difference is that The Graph requires subgraphs to be written to get data, making it more labor-intensive. Covalent, on the other hand, provides a no-code solution where all data is automatically available.

From a traction perspective, Covalent supports over 220 blockchains, compared to The Graph’s 35–40. Covalent also generates five times more on-chain protocol revenue than The Graph, indicating strong customer adoption and revenue generation. Additionally, Covalent continually reinvents itself, adapting to new narratives and integrating AI use cases. Covalent has introduced long-term data availability (DA), which complements rather than competes with short-term DA solutions like Celestia, EigenDA, or Avail. Covalent’s Ethereum Wayback Machine (EWM) and long-term DA focus on maintaining data over extended periods, enhancing the ecosystem’s capabilities.

The Concept of Long-Term Data Availability

As mentioned earlier, blockchains function more like billboards than databases, meaning data is only available for a limited challenge window, typically two weeks. To address this, we at Covalent have introduced and invented the concept of long-term DA. This term and concept are unique to Covalent and were developed in discussions with major DA layers like Eigenlayer and Celestia. I even did a panel on this topic at ETHDenver earlier this year. The purpose of long-term DA is to ensure data remains available beyond the challenge window. The Ethereum Wayback Machine is an implementation of this concept. While short-term DA covers the challenge window of about two weeks, long-term DA ensures data availability indefinitely.

How does Covalent use AI in its operations?

When people talk about decentralized AI, they often focus on decentralized training and inference, as seen in projects like Akash and io.net GPU Cloud. However, one overlooked area, which Covalent addresses, is decentralized data. Decentralized training and inference require trustworthy data to function effectively. Without reliable data, AI models can be corrupted by biases and manipulations.

Covalent’s unique contribution lies in providing decentralized data. The company has built the largest structured database in the world, indexing over 225 blockchains. This database includes all transactions, which are cleaned, normalized, and cryptographically secured. Covalent ensures that the data is not accidentally or intentionally manipulated, making it a trustworthy source for AI models.

In the AI landscape, as models provide answers, users will increasingly ask about the source of the data. Covalent offers a solution to this by partnering with decentralized training and inference engines, providing data that is free from biases and manipulations. This ensures that AI models are trained on accurate and reliable data, addressing a critical challenge in both centralized and decentralized AI.

Issues with AI Data Bias and Decentralized Data

The team at OpenAI manipulates facts to ensure their training models aren’t biased or racist according to their standards. But why should OpenAI’s opinion be the one that matters? What if another company trains an AI to be racist or provide incorrect medical facts? This issue is known as hallucination in AI models, where they generate false information. For example, if an AI gives a wrong diagnosis or uses copyrighted music without proper credit, it creates legal and ethical problems.

While using OpenAI models like ChatGPT and Claude is fun, we don’t know what’s happening behind the scenes. It’s like eating donuts for every meal — tastes great but is bad for you. Similarly, you have to question what goes into these language models. Are they presenting facts because they’re fun or reaffirm biases, or are they delivering the actual truth?

A major concern with centralized AI models, especially those developed by big firms like OpenAI, is the potential for future manipulation. This poses a significant risk as these firms have the power to influence the outputs based on their own biases or objectives. This is why decentralized AI models and data are so crucial. They offer a solution to this problem by ensuring transparency and preventing any single entity from having too much control over the data and its interpretation.

Decentralized data addresses these concerns. Current lawsuits involve organizations like the New York Times and Getty Images accusing OpenAI of using their data without permission. Decentralized data ensures that information used in AI training is accurate, unbiased, and properly attributed, preventing such issues and maintaining the integrity of AI outputs.

In the open-source ecosystem, which I strongly support, the transparency and collaborative nature of development help mitigate these risks. Decentralized data models are essential because they provide a transparent and reliable foundation for AI models. This way, we can ensure that the data fed into AI systems is unbiased and accurate, preserving the integrity and trustworthiness of AI applications.

Why Did You Decide to Migrate from Moonbeam to Ethereum?

When we started building the Covalent network, there weren’t many options for a scalable settlement layer. Ethereum mainnet was the primary option, as other solutions like Optimism, Arbitrum, ZK Sync, and others weren’t live yet. Back in 2021, the Polkadot ecosystem, particularly Moonbeam, was very promising and had a lot of hype. We chose Moonbeam for our settlement layer due to its potential and the excellent cooperation with the Moonbeam team.

However, two significant challenges emerged. First, our token, CQT, is an ERC20 token on Ethereum, so we had to bridge it to Moonbeam. This introduced security issues with the bridges. Second, Moonbeam required the use of Glimmer as a gas token, which created a cumbersome user experience, as users had to obtain a second token.

The security issue became prominent when the Nomad Bridge, which we used to bridge CQT, was hacked in 2022. This $200 million hack resulted in the loss of 10% of CQT’s supply, leading to a major setback for our community and a crash in token prices as the hackers dumped the tokens.

Following this incident, we realized that bridges were not reliable and coupled with the UX issues, we decided to migrate from Moonbeam to the Ethereum ecosystem. By then, many scaling solutions like Optimism and Arbitrum were available, making the transition smoother.

We completed this migration in late April, and the results have been phenomenal. Currently, 22% of the circulating supply of CQT is staked against the Covalent protocol, indicating strong support from token holders. We’ve increased our operators to 32, and every time we open up more space, it gets filled quickly, showing how easy it is to use the protocol without bridging or obtaining additional tokens.

In hindsight, moving to Ethereum was the right choice. Although it required some engineering work, it has paid off. The number of operators wanting to join Covalent is growing rapidly, and the metrics show how easy and effective the migration has been.

How Did You Convince Arthur Hayes to Join the Team?

We met Arthur Hayes at Token 2049 in September last year, and it took about six months to convince him to join Covalent, which he did in April of this year. Arthur, as many know, is the co-founder of BitMEX and the inventor of crypto perpetual contracts, a product that doesn’t exist in traditional finance. He’s a forward thinker, well-rounded, and not just an influencer but also a company operator, innovator, and technologist.

Our discussions with Arthur were very insightful. He asked direct questions like why Vitalik Buterin, the founder of Ethereum, isn’t talking about long-term data availability and what he’s missing in this regard. Arthur was genuinely curious and wanted to understand the intricacies of our project.

Arthur was excited about our focus on indexing and solving the problem of archival information on blockchains. He recognized that while many are working on more mainstream solutions like Layer 2 scaling, we are tackling a critical issue that no one else is addressing — ensuring the availability of historical blockchain data, which is essential for maintaining an immutable ledger.

Arthur brings immense value by thinking from first principles and providing unique insights into market development and token economics. For example, he helped us strategize on getting listed on exchanges like Upbit in Korea and advised on the yield structure for our new staking program. His perspective on ensuring yields are competitive with Ethereum’s APY was particularly helpful, suggesting that our target should be around 8–10% to attract interest.

He also supports our expansion into the APAC region, leveraging his network and experience. Arthur’s input on token economics, market strategies, and user engagement has been invaluable. His genuine interest in Covalent and willingness to help without any financial motivation is truly refreshing. This unique relationship and his deep involvement in our project have been incredibly beneficial.

Arthur’s extensive experience and network have already had a positive impact on Covalent. He provides focused, practical advice and opens doors to new opportunities, ensuring we stay ahead in our mission to make blockchain data universally accessible.

Buyback of CQT Tokens from FTX Bankruptcy Trustee

CQT is one of the tokens that was trading on FTX, with Alameda being a seed investor. When FTX filed for bankruptcy, all assets, including CQT, went through a liquidation process managed by a trustee. Galaxy eventually acquired the entire basket of assets from FTX, which included about 30 million CQT tokens, approximately 3% of the total supply.

We attempted to negotiate a buyback with Galaxy, offering a fair price typically around a 10% discount for unlocked tokens. However, Galaxy sold the assets to a private buyer who began dumping the tokens on the market, driving the price down from 40 cents to 16 cents. This caused significant disruption and frustration within our community.

After returning from Dubai, I saw the token price plummeting and received numerous concerned messages from our community. I contacted the person managing the liquidation and explained the damage caused by their actions. Eventually, we negotiated a deal to buy back approximately 13 million tokens at 17 cents each, amounting to about 1.7% of the supply.

This situation highlighted the unpredictable nature of the blockchain industry, where external factors like liquidations can significantly impact a project. The experience emphasized the importance of proactive management and community support in navigating such challenges.

I’ve shared this story exclusively here, reflecting on the broader implications for founders who need to protect their projects from unforeseen financial maneuvers. The incident underscores the delicate balance of maintaining token value and stability in a volatile market.

Market Plans and Strategies for the APAC Market

The recent 5 million dollar funding round has been instrumental in fueling Covalent’s expansion into the Asia-Pacific market. Although Covalent is already revenue-generating and didn’t strictly need the funds, securing partners who align with our values was crucial. These partners, including Rock Tree Capital and CMCC, bring invaluable regional expertise.

In April, I spent significant time in Hong Kong, Shanghai, and Hangzhou, engaging with the community and understanding the market dynamics. We hosted community dinners and gave a talk at Alibaba’s offices, which was very insightful. This expansion is essential for us, and raising capital from APAC-focused funds ensures we have the right support to grow.

The funds will be used for various initiatives, such as building KOL (Key Opinion Leader) communities, increasing liquidity, market maker engagements, and exchange listings. Additionally, we’ll focus on translations and AMAs to enhance engagement. For example, we recently conducted an AMA with the Chinese community, which was very successful.

A standout community member, Mint Ventures, created an extensive booklet on Covalent, showcasing their dedication and the potential of our project in the region. This kind of community engagement is precisely what we aim to foster with these funds.

Expanding into unique and differentiated markets like China requires technical know-how and expertise, which is why having the right partners is essential. Platforms like WuBlockchain play a vital role in spreading Covalent’s message. This funding round is a strategic move to ensure our successful entry and growth in the APAC market.

Managing the Market Value of CQT Tokens

The price of our token is crucial because a strong token value reflects well on the project and community, creating a positive cycle of attention and growth. Over the last few years, Covalent has focused primarily on the product — indexing blockchains, partnering with customers, and getting enterprise-ready. This focus on product development meant that we sidestepped the token go-to-market strategy, which is why the token has underperformed.

Starting this year, we’ve made a concerted effort to revitalize CQT. We’re making significant technical, economic, and governance changes to position the Covalent network for growth. We’re introducing a new token called CXT, which will be announced soon. This new token will be issued at a 1:1 ratio with CQT but will double down on our new narratives and provide more liquidity.

In the crypto industry, most people buy tokens on centralized exchanges. If you’re not on major exchanges, your token might as well not exist. Currently, Covalent is only on OKX among the tier 1 exchanges, which limits our liquidity. With the new token, we have lined up several new exchange listings, significantly improving our liquidity.

Retail awareness is another key area. Technical narratives about structured data and historical data appeal to a technical audience but not to retail investors. We need simple and compelling narratives like “structured data for AI” to engage retail investors. We’re also bringing on KOLs to tell our story and participating in podcasts to raise awareness.

Understanding and working with market makers is also essential. Many founders don’t know how market makers work, so we’ve changed our market makers to ensure price stability and better liquidity.

Improving liquidity, enhancing access, moving the token back to Ethereum, and increasing the percentage of tokens staked in the network are all part of our strategy. Currently, 22% of the circulating supply is staked, and with new operators joining, this should rise above 30%, creating supply shocks that can positively impact the price.

We’re also expanding in the APAC region, engaging with local communities, and partnering with regional experts. All these efforts combined will have a compounding impact on the token’s value. We’re committed to making the token a critical focus moving forward, balancing product development with effective market strategies. This second launch in Covalent’s lifecycle is an exciting opportunity, and we’re confident in our direction.

Upcoming Improvements and Final Thoughts

The AI developments at Covalent are extremely exciting. Our senior leadership has been engaging with AI technologies for over five years, and we have a wealth of knowledge in this area. Expect a lot more news, light papers, and utility from us, including light clients that will enable 10,000 people to access the token. There are many exciting things in the pipeline for AI.

On a more personal note, we’ve gone through various ups and downs, and some of your listeners might be experiencing their first cycle. Recent market drops can be intimidating, but they are part of a healthy correction. The meme coin frenzy and celebrity endorsements have been chaotic, but this correction helps clear out the noise and refocus the market on valuable projects. The upcoming news for the rest of the year is extremely bullish for crypto.

The Ethereum ETF is highly likely to be approved soon, possibly next week. The US election cycle is leaning towards a pro-crypto stance, which is also promising. The introduction of ETFs will bring significant inflows over time, similar to the gold ETF that saw steady flows over seven years.

The best investment anyone can make is in themselves. Despite market corrections, staying strong and focused is crucial. Crypto is now mainstream, with even political leaders discussing it. This maturity in the space, including advancements in self-hosted wallets, is encouraging.

No financial advice here, just a reminder to invest in your own knowledge and skills. Covalent is set for significant growth with the upcoming launch of CXT and other exciting developments.

I can say there’s much to look forward to with Covalent, keep an eye out for the launch of CXT and all the exciting things we have planned.

Follow us
Twitter: https://twitter.com/WuBlockchain
Telegram: https://t.me/wublockchainenglish