Long Take: User-Generated Finance and Cultural Financial Instruments, via Snoop Dogg, Dapper Labs, and $1.5B Decentralized Social
Gm Fintech Architects —
Reminder — we are moving the deeper analysis to Wednesday (i.e., today!). This is the last week it is open to everyone. Thereafter, the Long Take will be a premium offering.
Summary: The structure of capital markets precedes the innovations that come from it. High frequency trading, passive ETF investing, SPACs, and crypto assets all telegraphed their value proposition before becoming large and meaningful in scale. We are now seeing a new market shape emerge, one that starts with community and builds up into financial instruments that are cultural and social. This analysis looks at the most recent developments in the overlap between decentralized social and cultural work and related financial features.
Topics: capital markets, NFTs, Metaverse, identity, community, marketing, social media
Tags: Snoop Dogg, Gordon Gekko, Flashbots, Chromie Squiggle, Crypto Punks, Legg Mason, TikTok, Sorare, Palm NFT Studio, Dapper Labs, Friends with Benefits, Lil Miquela, BitClout, DeSo, Loot, NounsDAO, SharkDAO
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Long Take
The Alpha of Capital Markets Structure
One of the themes we like to revisit is the meta-structure of the capital markets. This matters to everyone — from founders and builders, to early and late stage investors, to asset managers and financial advisors. End of the day, we all need and care to generate positive financial performance to power our financial goals. We also need to know the game in which we participate.
For example, in the early 2000s it was valuable to understand that high-frequency-trading was going to change the nature of arbitrage, the place where such value accrues, and the hardware and algorithms required to get there. In the 2010s, it was valuable to understand what to do with retail stock trading flows, and how to get them into HFT firms. Now, one may want to really grok what MEV is and how Flashbots works within blockchain blocks.
Similarly, on the asset management side, seeing the nature of passive investing and the giga-wave of ETFs would have saved traditional active investment managers a lot of grief. The benefits of liquid trading for ETFs allowed for portfolio construction that used the equities technology stack (i.e., portfolio management, trading systems, account opening), and made more sense to regular people. Further the *meme* of passive investing — which is statistically true, whatever that means, but let’s leave that aside — devalued the work of well-paid CFAs at the large fundamental asset managers.
Therefore Legg Mason was worth only $4.5 billion when it had nearly $800 billion of assets. For comparison, DeFi protocol Yearn.Finance has about $6 billion under management and trades at $1+ billion — about a 30x differential.
A point we used to make often was the disconnect between public and private markets, and how private fintech companies often were much more “valuable” than the public equivalent, as well as how alpha stayed private much longer such that all IPOs were too late stage for retail investors. We thought that equity crowdfunding or tokenized private equity would be an answer, but the solution ended up being much more traditional — the SPAC structure. Despite a rough 2021, it is still a natural answer to the question of how a unicorn can go public fast.
Cultural Financial Instruments and User-Generated Finance
The latest observation is that blockchain-based capital markets are attracting massive risk capital due to their global nature, software superiority, and socio-political power. As a reader of the Blueprint you know this story well. Here are the flows just into traditional, old-world wrappers of large cap projects (h/t Coinshares). Far more is happening natively onchain.
But this information is well socialized.
So what underlying structural change do we need to further track? Well, the answer derives from the nature of open source finance. Anyone can contribute to and build on open source codebases. And they have! This is what makes DeFi and NFTs “permissionless”. Once you have enough contributors and consumers of those contributions, you start forming tribes and communities. Those take shape as a way to splice up value, articulate relative power, generate and assign work, and defend the perimeter. They develop flags and insider secrets, which in turn signal exclusivity, and raise the price of belonging.
We know that people pay $5MM+ for a Punk or $2MM+ for an OG Chromie Squiggle, among lots of other fantastic data points. They pay to be part of a social club that allows them access to social and financial capital entirely separate and apart from the old world. Traditional signals of wealth or expertise, such as a Stanford MBA, will not end up superseding native digital identity.
Cultural power, on the other hand, just might. When Snoop Dogg announces himself to be a top NFT trader, brokers of cultural financial instruments pause and listen. When TikTok starts financializing its top memes, the markets shift and twist to reflect a new underlying exposure.
What’s a cultural financial instrument? It is the set of economic attributes of any particular cultural object — whether that is specific art, music, video objects, or even entire creative industries like gaming. Increasingly more of the basics of our lives are commoditized and politically subsidized. The places where we make new things are conceptutal, digital spaces, and our labor is thus far more abstract, and increasingly relational.
What does the caricature of Gordon Gekko have on our current moment? The same old rallying cry, now echoed through anonymous avatars on Twitter and Discord quoting Austrian economics.
Levering up and selling cash cow companies seem quaint now — the financial instrument relates merely to real world economic activity, grounded in spreadsheet arbitrage. An equity or bond attaches to a cap table and a body of Delaware law. You might have thought that speculation and financialization was for such big chunky, boring investments. But not anymore. Rather, it is legion, dancing at a neon pixel party.
Instead of issuing a single token and hoping to get SEC approval, we are going to be issuing millions of tokens — like the millions of emails and websites the Internet churns out of its communications cortex.
Whereas the prior media disruption was user-generated Content, the current one will yield user-generated Finance. User-generated finance and its cultural financial instruments need communities to be valuable, and markets to be valued.
Markets are the capillaries of a financial community corpus. You can call it a DAO or a Discord or a Partnership or a Corporation or a Polity. It is the gestating idea super-organism, calculating its genetic persistence in the minds of its believers.
We feel like children grasping for an explanation here. It is hard for finance people to be artists and rebels. We know it has something to do with supply and demand. We know it has everything to do with Gen Z. But there it is; something hazy beyond the fog making sense of it all.
Decentralized Social Finance, or a Financial Society
Let’s run a couple of symptoms through this set up.
Just by invoking the word “community” doesn’t of course generate a community. In the same way that invoking the word “growth hacking” doesn’t grow product without some actual work. Community requires ecosystem and mechanism design, giving people roles, responsibilities. Members do not have to be product users or investors; they may have a number of different motivations. But in all cases, it requires wrapping them in a promise of a shared whole.
Some communities are very clearly prescribed. When we look at Sorare raising $680 million for its NFT football platform, we see a clear delineation between a company, licensed intellectual property, and a collector fanbase. The company makes a product to distribute to consumers. Similarly, when Palm NFT Studio partners with DC Comics on distributing collectibles to its fans, we are not confused about which organization does what. There are well organized issuers of cultural capital, and then monetized consumers thereof.
Much of this type of enterprise NFT activity is inspired by Dapper Labs, and its massive success with NBA Top Shot. So an important recent development to watch is Dapper buying out Brud, the masterminds behind virtual influencer Lil Miquela. Brud CEO Trevor McFedries is also behind Friends With Benefits, one of the most active DAO communities out there.
Let’s slow down for a second. Trevor reverse engineered how to build massive social engagement by creating a rendered Instagram personality. This personality grew into millions of followers. This is literally toying with Web2 and its feed algorithms. He then built out a community that is Web3 native — guarded by a token gate with a fungible token floating on decentralized markets.
This is “community” or “demand generation” through cultural engagement in a tech-first environment. What is the acquisition strategy? In Web2, it is feeding socially addictive hooks into the machine learning current of the social networks. In Web3, it is handing out financial value to community members — about $75 million of it — such that they are incentivized to spread the mission of the tribe. Useful shareholders.
And then it was acquired by Dapper Labs, which shepherds a blockchain infrastructure called Flow, which trades at about $1.4 billion in token value.
While not particularly decentralized or permissionless, Flow still wants what all infrastructure wants — to power transactions. We can think of it, and other Web3 infrastructure, like the Nasdaq for computation. It wants volume. Think of this as a supply function. NBA Top Shot and Friends With Benefits generate demand.
A similar example we give is the DeSo blockchain, which stands for “Decentralized Social”. DeSo just launched with $200 million in funding from the usual crypto VCs (i.e., a16z) and powers BitClout. The founder, Nader Al-Naji, previously tried to build the stablecoin protocol Basis, raising and returning $130 million in 2018 after being chased around by regulators. Algorithmic stablecoins are a pretty-sure-way to print some money supply (see Maker).
But layer 1 computation blockchains are even better. The chart below shows about $1.5 billion in value created in less than a year, and we assume a bunch of that was distributed to founders and early investors.
We’ve covered BitClout before here, commenting in particular on the Bitcoin inflows that the ecosystem experienced during the launch of its app. This recent USD-denominated funding round was separate.
Something interesting is going on in the framing of how this whole project launched — first pulling the social graph off Twitter without any particular personal consents, then having developers discover that they can “just push third party code” to connect to BitClout’s systems via GitHub, and then finally the separation of those systems into the DeSo blockchain. We think that this sequence is no accident, but instead informed by Al-Naji’s experience with Basis and wanting to appear “sufficiently decentralized”.
If you don’t understand how such a structuring works, and how it is a response to regulatory confusion, you will miss capital exposure to early stage protocol investment returns.
The last phenomenon to revisit is Loot. We introduced and discussed the concept of Loot NFTs here, and since publication there has been more and more development in associated projects. As a refresher, Loot NFTs function as anchors for a community to form around, build experiences, and distribute those experiences to players. Consider it to be decentralized intellectual property. As a comparison, Crypto Punks — which are not decentralized — just signed an IP licensing deal with United Talent Agency, which implies potential for a whole series of media outcomes.
The real test is whether any of the disconnected narratives and markets connect to each other in a meaningful way. A couple recent launches suggest that it could be possible, from bespoke character adventures, to a full-fledged trading marketplace whose fees accrue into a communal balance sheet.
Some of the deepest community work that we see happening is with groups like NounsDAO and SharkDAO. There, capital is contributed onto a treasury, which then permissions community members to join and govern, which in turn funds the creation of products the community values, which in turn funds the treasury.
Key Takeaways
This stuff can seem murky, and loosely connected.
The core realization is that the shape of intellectual work and the distribution of its fruits is shifting dramatically. We are used to and understand the grind of corporate PowerPoint-making and spreadsheet analysis. We get the private equity types flipping cashflow-positive businesses. We also have learned how the Facebooks and Amazons think about finance, and their propensities for staying out of product manufacturing.
But we are not yet ready for user-generated finance and social communities with economies at their core, spitting out open source software products that burn hot with financial value. The next frontier markets and the instruments they exchange are being built on Web3 by culture warriors, leveraging the mana of their own belief. When you see this type of novelty, choose it and support it.
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