Binance Labs, the incubation and seed funding arm of the world’s largest crypto exchange, has made its first investment this year, backing decentralized privacy startup HOPR.
Announced Thursday, Binance Labs led a $1 million seed round in HOPR, which has also received funding from Focus Labs, Spark Digital Capital, Caballeros Capital and Synaitken. The seed round followed a fellowship award the startup received last year from BinanceX, the exchange’s early-stage developer platform.
The investment in HOPR, which takes data privacy to the next level with a token-incentivized mixnet solution, was a long time in the making, explained Binance Strategy Officer Gin Chao.
“The team from BinanceX met HOPR over a year ago at Paris Blockchain Week, and we have got to know the team,” Chao said in an interview, adding:
“We will be making much fewer investments, and these are the sorts of projects we will be focused on, in areas that we feel have a sort of immediate product-market fit.”
Chao said data privacy has proven value in traditional markets as well as crypto, and HOPR also has the right kind of credentials – with a token sale on the way and plans to become a legally recognized decentralized autonomous organization (DAO) in Switzerland.
“I think it’s the right type of problem to be solving at this time and HOPR’s solution is a great fit in terms of the ethos of blockchain and having an eventual decentralized organization with a token to address the problem,” Chao said.
HOPR is not another on-chain privacy solution for blockchain transactions, explained HOPR co-founder Sebastian Bürgel, but a general network-layer protocol to allow users to exchange data privately, in the same vein as Tor (the onion router) or a virtual private network (VPN).
The idea to incentivize participants with tokens to enhance the privacy of a network is not entirely new; the Ethereum-based Orchid protocol does this, too.
The problem, said Bürgel, is that when any two computers are communicating, many third parties – such as telcos and internet service providers (ISPs) – are privy to that data, not to mention a host of metadata.
Data transmitted via the HOPR network “hops” from one relay node to the next, where each participant mixes that message with other traffic before sending it on.
“Anybody can participate and be paid for the service of relaying traffic and thereby creating privacy for you,” said Bürgel. “You are paid in HOPR tokens similar to how miners get paid ETH on Ethereum.”
In terms of what participants can expect to earn from relaying and mixing on HOPR, Bürgel said this would be difficult to estimate, not the least because the network will not be centrally controlled in any way.
“We imagine this is going to be a kind of marketplace,” he said. “I think it should be something that is comparable to a VPN subscription, which is an order of like $10 a month, so for some reasonable usage it should be in that range.”
Bürgel pointed out that VPNs have a history of leaking private data and also selling and monetizing that data, while Tor’s onion encryption doesn’t really do a good job of metadata privacy, and a particularly large data packet can be tracked going through the Tor network.
“HOPR packets all look the same,” said Bürgel. “There’s a lot of cryptography under the hood, but basically HOPR packets are indistinguishable from one another and we are also mixing packets, so that brings significantly more privacy than Tor could offer.”
The network is still in the testing phase, but a medical data use case has been explored involving data transmitted between a hospital and a cloud provider. Another useful avenue involves regulatory requirements such as General Data Protection Regulation (GDPR) and also things like the Financial Action Task Force’s “Travel Rule” requirement.
“HOPR is perfectly positioned to deal with GDPR and to facilitate the exchange between regulated custodians, and we have been talking to Switzerland’s OpenVASP about this,” Bürgel said.