Authors
Kate Goldman
In this newsletter
Decentralized Autonomous Organizations
Blockchain and the Music Industry
Cloud Computing
Digital Banking
Decentralized Autonomous Organizations
Decentralized autonomous organizations (DAOs) are becoming one of the most prominent applications of the cryptocurrency world’s quest for financial democratization. DAOs are essentially the digital asset ecosystem’s response to big private equity funds and asset management firms; they are a new way for the average citizen to contribute cryptocurrency to a broader pool of funds in exchange for a stake in governance decisions. People contribute cryptocurrency to the fund, receive membership tokens that represent their stake in the decision-making around what to do with the funds, and then the DAO eventually comes to a consensus agreement via the blockchain on the best use of its assets. As Ethereum Founder Vitalik Buterin notes, DAOs control internal capital via software code and a blockchain-based contract that transparently records each investor’s stake and their voting decisions. While automation, as the name suggests, is at the core of a DAO’s functions, decisions are still made by humans, without the hierarchical structure found at traditional funds.
DAOs have contributed to the rise of protocols with specific purposes, like the pooled fund that was ultimately outbid by a (human) hedge fund billionaire for a copy of the Constitution. As reported by VICE, ConstitutionDAO raised US$40 million worth of ether through its issuance of the $PEOPLE token, which represented a stake in the decision-making process on what to do with the Constitution if it was successfully purchased. These governance tokens were issued and flipped in secondary markets by investors, even though these tokens would not have represented any stake in the ownership of the document itself. Despite the issuance of these governance tokens, ConstitutionDAO did not establish a formal voting structure, and what comes next for the investors and the DAO is not clear.
Blockchain and the Music Industry
As streaming services like Spotify continue to solidify their hold on the music industry, many have taken note that the relationship between artists and such platforms are repeating similar, troubling patterns seen between artists and their labels. In response, some have started suggesting blockchain could be a way to democratize the industry and give artists control over their own music. The movement comes in part on the heels of Taylor Swift’s decision to rerecord her albums, a move that grants her greater control over her pervious body of work. According to Time, Swift decided to re-record her albums to reclaim ownership of her music after music mogul Scooter Braun sold her masters to Shamrock Holdings for an estimated US$300 million.
In its latest push to invest in the creator economy and give autonomy back to artists like Taylor Swift, venture capital firm Andreessen Horowitz has invested in Royal, a platform designed to give artists the ability to use NFTs as a mechanism for creating additional revenue streams and rewarding loyal fans while maintaining more control over the distribution of their creative product. As explained by The Verge, Royal facilitates the process of selling digital representations of an artist’s work in the form of tokens, which generates revenue for the artist and gives fans a stake in future royalties. All these transactions are recorded on the blockchain, and artists can keep track of their most loyal fans and begin layering additional benefits for them. This model turns the current power dynamic upside down and unlocks creativity by avoiding the arduous legal complications that have always plagued relationships between artists and record labels. Instead of going through labels to clear samples, artists can now directly buy into other artists’ works via token sales to claim rightful ownership.
Cloud Computing
In partnership with Amazon’s Web Services team, Goldman Sachs is setting itself up to be a cloud computing force on Wall Street by offering its market division’s clients stores of data and analytical capabilities to optimize the investment process. As Matt Levine of Bloomberg notes, Goldman Sachs hopes to generate more business with hedge funds and similar clients in the asset management space by offering them access to premium data and tools that will result in quicker trades and more frequent business with the sales and trading division. The goal is to reduce the amount of time clients take to accurately weigh and analyze investment decisions to increase the volume and frequency of trades.
This move is yet another step toward investment automation and algorithmic decision-making in financial markets, as big banks like Goldman Sachs have begun to recognize the potential synergies gained from automating processes typically left to human advisors. It’s also not the bank’s first time trying to secure more business with advanced tools; in 2020, Goldman Sachs’ investment banking division rolled out Gemini, an application meant to facilitate mergers and acquisitions for clients. According to Bloomberg, the application allows companies to compare various business segments with the rest of the market, leading to recommendations about potential spin-off or takeover targets. That idea is the same as the driving principle behind today’s cloud computing venture: If clients use the bank’s technology to make investment decisions, they are also more likely to contract with them to execute trades or take on the prominent advisor role.
Digital Banking
Brazilian neobank Nubank, famously backed by billionaire investor Warren Buffett, recently slashed its initial public offering (IPO) share price range to between $8 and $9, a decrease from the initial range of $9 to $11, as reported by the Financial Times. While the new projected market cap falls beneath the previous valuation of upwards of US$50 billion, it is still one of the most anticipated IPOs of the year. However, India-based FinTech Paytm’s share price plummet has inflicted more fear for similar lossmaking FinTechs. According to The Wall Street Journal, Paytm’s share price plummeted 37 percent within its first two days of trading, sparking criticism of the investment banks that priced the IPO. Like Nubank, Paytm isn’t profitable, and there isn’t clear guidance on which business segments will be able to obtain the margins and growth needed to sustain investor confidence. Net losses for Nubank have increased by almost 54 percent year-over-year to over US$99 million, leading to some concerns about whether the company will be able to monetize its Latin American customer base to justify its US$40 billion valuation target.
In response to the Consumer Financial Protection Bureau’s most recent report on banks’ significant dependence on overdraft fees, Capital One has decided to eliminate the practice, which used to charge customers up to US$35 for each transaction that exceeded a customer’s balance, according to CNBC. Big consumer banks like Capital One have faced pressure from politicians to eliminate such fees since last March, as many families have been hit hard by the pandemic’s economic effects. However, this is not just Capital One responding to backlash from Congress. It is also a move to ensure its survival in the age of neobanks. While Capital One will forgo over US$150 million in revenue by eliminating its overdraft fees, the move may be in the business’s best interest as it tries to compete with neobanks, which have always guaranteed no overdraft fees, no monthly fees, and no minimum balances.