Investment Report: Linen

Apr 24, 2021 15 min read

What Is Linen

Linen is a startup raising on Republic that designed an app (currently in beta-testing on IOS) that will allow users to store and exchange cryptocurrencies (a wallet) while allowing them to access certain blockchain-based protocols, including liquidity pools in DeFi (such as Compound).

More specifically, Linen designed a non-custodial wallet that does not require writing down a seed phrase for wallet backup and recovery. Using a smart contract on the Ethererum blockchain, users can recover the account using their email address, phone number, and the backup file saved to the iCloud Drive associated with the Apple ID used when signed up.

Why investing in a crypto wallet when there are so many others (like Coinbase) out there? As mentioned in our last email, Coinbase Wallet and most other non-custodial wallets require writing down a seed phrase as a primary backup and recovery mechanism. Seed phrase can not be recovered if lost; hence all funds in the wallet become inaccessible forever. Some of the non-custodial wallets like the Coinbase Wallet provide secondary backup mechanisms for a seed phrase. However, those mechanisms still require passwords that can not be recovered. This is the number one obstacle to onboarding a more mainstream audience to the crypto economy.

That’s why Linen designed a self-custody consumer-grade wallet specifically designed for non-tech savvy users. Self-custody without writing down seed phrases is a very hard task to solve, and, in addition to Linen, only Argent and ZenGo solved it.

Linen Vs. MetaMask

As you know, I always make sure to verify and try the product myself. So I downloaded Linen a few days ago, but there were 13k users on the waitlist before me. I was able to get in touch with Vitaly, Linen’s founder, that has been so kind to let me jump the waitlist. Below are some screenshots I’ve taken from Linen and MetaMask, one of the most popular wallets for tech-savvy users, to compare their recovery setup.

*Wallet Recovery Setup On Linen
*Wallet Recovery Setup On MetaMask

As depicted above, the user just needs to click a button to approve creating a backup file on its drive on Linen. The process is way less intuitive on MetaMask. Let’s imagine a user who doesn’t know anything about blockchain, DeFi, seed phrase, password managers, and so on—MetaMask would be impossible to use.

Moreover, after the sign-up process is over, you can start depositing funds to compound and earn interest right away on Linen. The UI is incredibly user-friendly. When you open the app, you see a list of stablecoins and the related APY (annual percentage yield). You can click on one of them, deposit funds through your bank account, and start earning interest right away. Below you can see a comparison with MetaMask, where you only see your ETH balance at sign-up, without any additional info. If I gave the two apps to my father, you can bet he would never be able to use MetaMask. On the other hand, I’m pretty sure he would handle Linen without any outside help. It is so intuitive that you just need 3 clicks to start, making it suitable for a non-tech savvy user like him.

I’ve also tried Argent and ZenGo, two wallets that offer a very similar experience, competing with Linen in capitalizing on the mainstream audience’s adoption of Blockchain. However, As wallets aren’t a winner-take-all market, there will definitely be space for more than one major player. We can take the fintech market as a comparison, where digital banking apps like Revolut, Chime, N26, Monzo, Varo, Money Lion are all valued at $1B+ now—or investing apps like Robinhood or eToro, both worth +$10B.

Can Linen Build A Sustainable Economic Moat?

As Vitaly points out in the campaign, there are not too many developers capable of building a self-custody crypto product now, and those who can are building their own companies and can't be hired now. This is a significant barrier to entry, and that is why we are seeing acquisitions and not build in-house solutions. Binance acquired Trust Wallet, Coinbase acquired Cipher wallet (renamed Coinbase Wallet), Kraken is on the market to acquire a self-custody wallet, Paypal has recently acquired Cure (custody) for $200m.

There is a shortage of crypto/blockchain talent on the market now and is expected to remain that way for the foreseeable future due to the industry’s growth. Furthermore, Linen’s first-mover advantage enables the company to establish strong brand recognition and customer loyalty.

Product-Market Fit

Did Linen build something that customers want? Are they willing to pay for it? How good is customer retention? If they didn’t already find a product-market fit, how likely is it that they will find it?

Linen is still in beta-testing on IOS but already has +15,000 app downloads. Since the app is not yet ready to scale, they are not pushing for growth yet. However, to make sure the market wants a similar product (a key-less and easy-to-use crypto wallet), we just need to look at Argent and ZenGo. As depicted below, ZenGo was released on Jan 19, 2020, and already has 100,000+ downloads.

But that’s more. ZenGo has 1.2k reviews on the AppStore, and, as depicted below, people love to have a key-less and easy-to-use crypto wallet.

This is definitely proof of product-market fit. Not only do Crypto beginners love a key-less and easy-to-use crypto wallet, but they need it. And when more and more crypto users start introducing their friends to crypto, apps like ZenGo, Argent, and Linen will be the way to go.

The Business Model

How will Linen make money? Is the business model sustainable and scalable in the long term?

With regards to current financials, Linen is still in the pre-revenue stage. But there are different ways they can monetize, and we can take a look at MetaMask to assess the crypto wallet business model:

Linen can monetize through asset swap fees—transaction fees on crypto assets exchanges. Swap refers to exchanging one crypto asset for another, like swapping BTC into ETH, without first exchanging them into dollars. To get an idea of the scope of the model, I searched some data on MetaMask, which introduced a coin swap feature in October, 2020. The service allows users to swap their Ethereum-based tokens at current exchange rates directly in their wallets. MetaMask acts as an “invisible” decentralized exchange platform. To support these swaps, MetaMask has integrated the largest liquidity pools, such as Uniswap, AirSwap, 0x API,, Paraswap, Totle, and For each swap made this way, MetaMask takes 0.875% in fees. As depicted below, MetaMask swap daily volume is between $30M-$40M right now, with daily users growing each day, allowing the company to earn between $300k-$400k in daily revenue.

Source: Dune Analytics
Source: Dune Analytics (Ignore the drop of the last day since I downloaded the graph in the early morning).

Asset swap is not yet available in Linen, but the company is working on the feature, and I guess they will be able to get it done faster when their Republic campaign is over, and they have the funds to hire more staff.

Another revenue stream consists of affiliate fees from liquidity pools. As mentioned above, wallets let users exchange their crypto by connecting them to liquidity pools, which are used to facilitate trading by providing liquidity. While assets swap fees are charged to the user, affiliate fees are commissions that wallets receive from liquidity pools for every referral. As the founder points out, a liquidity pool like Aave or an aggregator contract like Yearn can have built-in affiliate fees in their contracts. Since all liquidity pools have to compete for liquidity, they will gladly share fees with wallets. As per asset swap fees, this is something that will be implemented in the future. I agree with the founder that the focus is on product development and user acquisition, with monetization coming later.

Another revenue stream is premium subscriptions. It is too early to talk about them at this point. But I guess it will be something similar to what other fintech apps are doing (lower fees, priority support, etc…)

The Market

Is the market big enough? Is it a stable/growing market? Could we make a 100x return if everything goes smoothly?

Since one of the main features of a crypto wallet is crypto storage and swap, we can start by looking at the global market cap of crypto assets. According to CoinMarketCap, the total market capitalization of crypto assets stands at +$2T at the time of writing.

Source: CoinMarketCap

Almost all of the outstanding crypto assets are held in crypto wallets without earning any interest. But in addition to storing and swapping crypto assets, users can now lock them in DeFi pools and earn significant interest on their holdings. Decentralized finance is an emerging phenomenon that we’ll definitely revolutionize fintech.

Note: Note: In its most simple form, decentralized finance refers to a system where software written on blockchains makes it possible for lenders and borrowers to interact peer to peer without any company or institution facilitating a transaction. Smart contracts that automate agreement terms between lenders and borrowers make these financial products possible. For example, the APY (annualized percentage yield) on USD coin is at 3.86% at the time of writing. That means that you can save your USDC (a stablecoin fully backed by the US dollar) while earning a 3.86% annual interest in a world where interest rates are near, or below, zero. If you are completely new to DeFi, you can take a look at this video that explains it in the most simple way possible.

As of January 1, 2021, $16B of crypto-assets were locked in DeFi. Well, that value is almost fourfold as of April 21, 2021, with $57B locked in DeFi. Apps like Linen will play a crucial role in this market, allowing non-tech savvy users to earn interest on their saving with 3 clicks, without any kind of long-term contracts and clauses typical of savings accounts.

Update: As of May 14, 2021 (less than a month since I wrote the report), assets locked in DeFi are $83.08B.

Source: DeFi Pulse

So how do you participate in DeFi and earn interest? You need a wallet to connect to liquidity pools. While there are many different ways to participate in liquidity pools and earn interest on your savings, almost all of them are way too complicated for non-tech savvy users. On the other hand, Linen allows anyone to participate in DeFi using a simple and easy-to-use app without the need to use any other outside service. Below is a screenshot I took from a subreddit on DeFi. As you can see, non-tech savvy users have a hard time using MetaMask (a wallet) and Compound (liquidity pools). On the other hand, Linen allows you to connect to Compound without even knowing what Compound is about.

Note: Note: Like most Decentralized Finance (DeFi) protocols, Compound is a system of openly accessible smart contracts built on Ethereum. Compound focuses on allowing borrowers to take out loans and lenders to provide loans by locking their crypto assets into the protocol. The interest rates paid and received by borrowers and lenders are determined by the supply and demand of each crypto asset. Interest rates are generated with every block mined. Loans can be paid back, and locked assets can be withdrawn at any time. (If you want to learn more, here is an easy-to-understand article about it.)

This is definitely a huge market. And the proof is Metamask started monetizing its user base in October 2020, growing from 0 to +$100M ARR in a matter of months. And we should keep in mind that the crypto market is still in its infancy, with mainstream users still not aware of it. As we’re going to discuss in the following PEST analysis, many social and economic trends will shape the mainstream adoption of blockchain and crypto-assets. So I strongly believe that blockchain and DeFi will have so many applications in the future that we can’t even imagine. If Linen was an eCommerce and we were in the early 2000s…well, we’re still just selling books for now.

PEST Analysis

PEST Analysis (political, economic, social, and technological) is a framework to assess major external factors that influence a company's operation.

If the first thing that comes to your mind when thinking about cryptocurrencies is speculation and hype, I’ll gladly show you how important are cryptocurrencies and blockchain for many emerging trends that are shaping the world of tomorrow.

→ The importance of crypto in developing countries

The following graph (here is the full report) shows the percentage of the population who indicated they either owned or used cryptocurrencies. As you can see, developing countries are the major adopters of cryptocurrencies, and this is by no means a coincidence.

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