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The crypto firm Layer N announced on Wednesday a seed round of $5 million co-led by the Peter Thiel-backed Founders Fund and the decentralized investment group dao5, as well as Kraken Ventures and Spencer Noon, a former partner at the crypto fund Variant.
Layer N is a layer-2, or a type of blockchain built on top of a different blockchain—in this case, Ethereum—to help increase speed and capacity. The investment from Founders Fund represents the venture firm’s second foray into crypto since its April hire of new partner Joey Krug, the former co-chief investment officer of the crypto-focused venture firm Pantera.
One of the organizing partners at Founders Fund is Peter Thiel, the PayPal founder with a penchant for crypto. Thiel has publicly supported the industry’s ideology, raving about the advantages of Bitcoin over fiat currency at the Bitcoin Miami conference in 2022, with the digital asset representing one of the firm’s core positions. The Financial Times revealed that Founders Fund had in fact sold off the vast majority of its holdings the month before Thiel’s appearance at Bitcoin Miami, anticipating the ensuing Crypto Winter.
While Founders Fund has stayed quiet on crypto during the bear market, it announced its hire of Krug in April, signaling an intent to re-enter the space. Layer N represents its second blockchain investment—with a modest $1.8 million—after backing the DeFi protocol Maverick in June.
In an interview with Fortune, Krug declined to comment on Founders Fund’s crypto strategy, but said that the investment in Layer N fit in with its broader thesis of backing teams working in niche markets that can expand.
As a layer-2 built on Ethereum, Layer N is focused on increasing transaction throughput and latency potential to replicate the speed of traditional financial markets on the blockchain. Its founders argue that other layer-1 and layer-2 solutions are still too slow and bulky to attract the type of high-speed trading that’s common at exchanges like Nasdaq.
In an interview, cofounders Dima Romanov and David Cao explained that the priority now will be attracting crypto traders and protocols like decentralized exchanges. While other new layer-1 blockchains such as Sei have a similar pitch, Romanov and Cao argued that Layer N offers the relative security and reliability of Ethereum as its underlying blockchain.
The other consideration is the reality that crypto trading volumes have plummeted over the last year, with spot market trading last month hitting a 4.5-year low. Krug told Fortune that Founders Fund targets companies they believe have high potential for tech innovation to capture future market share, even if the current market looks small.
“I don’t think the dollar figures have to be super massive,” he said. “It’s more making sure that they are actually the dominant player in the market.”
Layer N’s longer-term goal is to be able to allow centralized exchanges like Binance and Coinbase to build decentralized, noncustodial offerings on top of the blockchain—something Coinbase has previously shown interest in with its 2018 acquisition of the decentralized exchange Paradex, a project that Krug worked on. He said it ultimately wasn’t successful because the tech wasn’t yet good enough.
In the post-FTX world, centralized exchanges are having difficulty building trust with users—something Krug believes they would be able to solve by building decentralized versions on Layer N with the same type of interface that users are accustomed to on established players like Coinbase.
Layer N had previously planned to build its blockchain on top of Solana, announcing funding from FTX Ventures in November, before the exchange collapsed. Romanov said those funds never materialized and that the team decided to pivot to Ethereum after realizing that most institutional players and liquidity providers were coalescing around the blockchain.
Layer N plans to release its testnet in one to two months. Cao said the firm has not yet decided whether it’s going to release a token like other layer-2s, such as Optimism and Arbitrum, due to regulatory uncertainty and an open question over whether a token would add value to users.
“There’s this notion that if you look at the DeFi space right now, it feels like it’s in a trough,” Krug told Fortune. “AI has taken a lot of oxygen out of the room, and so I think an investment like this feels contrarian.”
“I’m hopeful that it’s right,” he added.
