Blockchain Powered Asset Tokenization Protocols Threaten Goldman Sachs’ Investment Banking Business

Open innovation has a strong foothold in the tech industry. Big tech companies create application programing interfaces, or APIs, to tap into the knowledge base of outside software developers. By doing this, centralized companies are able to access external pools of knowledge that enhance the value of their own proprietary application. One prominent such example is Facebook’s ‘Like’ button API. Facebook made integrating the ‘Like’ free and easy because it let them tap into apps’ users, giving them access to massive data they didn’t have access to before.

This type of open innovation isn’t unique to Facebook – most all tech companies do it. This isn’t, however, the case for all industries. Tech lies on one end of the open innovation spectrum while the financial sector lies on the other. This is especially true for underwriting services provided by large investment banks like Goldman Sachs. Cofounding Decipher Capital – a VC fund investing in blockchain-enabled projects – coupled with being an investment banker at Goldman gives me a unique perspective into how and why blockchain enabled technologies, specifically asset tokenization protocols, will disrupt investment banking.

This inevitable disruption is best understood by looking at the status quo. Today, Goldman tends to underwrite deals exceeding $100mm. Deal size and limited capacity forces it to be selective with the clients it takes on. Administrative, management, labor, and the other costs related to underwriting a deal don’t change based on deal size – they’re more fixed than variable. As such, Goldman is incentivized to chase larger deals to maximize unit economics. This business model has worked till now because raising capital is expensive and time-consuming, incentivizing companies to minimize the frequency while maximizing the size of capital raises.

That said, it won’t be like this for much longer. Decentralized, open-source smart contract protocols are enabling the tokenization of real-world assets – including equity and debt.

Figure 1: Explanation of Tokenization [1]

Tokenization of equity and debt means that capital raises will be faster and more efficient. This is because blockchain limits inter-party dependency for access to relevant information. Compliance requirements, for example, can now be programmed into tokens via smart contracts, reducing time and money spent on on-going compliance efforts. Given this speed and efficiency, tokenized assets can be further fractionalized, allowing for wider ownership and deepening markets.

Figure 2: Benefits of Tokenization [2]

The benefits described above mean lower all-in issuance costs for companies. They reduce the time management spends raising capital, lower the fees paid to intermediaries, and minimize losses due to market inefficiencies like deep discounts and high interest rates. Just looking at IPO gross spreads gives us an indication of how costly capital raises are for companies. Given 2016 numbers, the average gross spread for a company raising $1.0bn through an IPO would have been 5.4%, translating to $54mm dollars in underwriting fees alone. Companies will find ways to reduce such costs once viable options are available.

Figure 3:  Average underwriter fee in IPO in the United States from 2014 to 2016, by deal size [3]

Therefore, if Goldman wants to be competitive in this new blockchain environment, it needs to use blockchain to enhance its underwriting capabilities. Goldman will need to streamline information flow between syndicate banks and clients, reduce costs associated with on-going securities compliance, and increase market depth for its. If Goldman doesn’t innovate, its underwriting business will suffer from decreased deal flow and margin compression as companies search for the cheapest, viable options.

Goldman hasn’t been sitting on the sidelines. They’ve reacted by actively participating in the blockchain space. Although the press has been focused on Goldman’s short-lived plans to open a bitcoin trading desk [4], its true strategy lies in its investments in blockchain companies. Goldman recently invested in Veem [5], and Tradeshift [6]. Both investments were made through its Principal Strategic Investment Group (PSI). PSI tends to invest in companies that they expect at least one other part of the bank to benefit from a partnership with the portfolio company [7]. These investments increase Goldman’s exposure to blockchain, but the underwriting business is unlikely to be a direct beneficiary of such partnerships. Goldman needs to spend more time integrating blockchain into the day-to-day operations of its underwriting business and not rely on strategic investments by PSI to keep this business competitive.


Final Thoughts and Questions

There is no doubt that tokenization has the ability to reduce capital issuance costs. At minimum, Goldman may want to implement blockchain to reduce the back-end costs of underwriting a capital raise. The question is not a matter of if but of when. How long until capital raised through tokenized assets match that raised through the traditional capital markets? 2 years? 3 years? 5 years max?


Disclaimer. This post is intended for informational purposes only. The views expressed in this post are not, and should not be construed as, investment advice or recommendations. This document is not an offer, nor the solicitation of an offer, to buy or sell any of the assets mentioned herein. All opinions in this post are my own and do not represent, in any manner, the views of Decipher Capital Partners or affiliated companies.


[1] Decipher Capital, “Primer on Security Tokens”, August 2018.

[2] Decipher Capital, “Primer on Security Tokens”, August 2018.

[3] statista, “Underwriter fees in U.S. IPO, 2014-2016, by deal size”, January 2017,, accessed November 2018.

[4] Diptendu Lahiri, “Goldman drops bitcoin trading plans for now: Business Insider”, Reuters, September 5, 2018,, accessed November 2018.

[5] Veem, “Veem Secures $US 25 Million to Expand Global Payments for Small Businesses”, September 26, 2018,, accessed November 2018.

[6] William Suberg, “Goldman Sachs-Backed Tradeshift Eyes Blockchain After Successful $250 Mln Funding Round”, May 30, 2018,, accessed November 2018.

[7] Goldman Sachs, “Investing and Lending Principal Strategic Investments”,, accessed November 2018.

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Fat Protocols and Value Capture Over Time (Part 2 of 2): Stack Abstraction

Part one of this post delved into how the shared data layer isn’t as open as described by Monegro in ‘Fat Protocol.’ In this part — part two — I’ll explore how, over time, protocol layer abstraction will transfer value from it to the application layer.

To understand how this will happen, we must first understand that Ethereum and other emerging protocols are nothing but technology platforms. They’re just abstractions that help developers utilize the language that they sit on top of. For these platforms to be successful, we need developers that know how to build things on both the platform and the underlying programming language. In short, for Ethereum to be successful, we’re going to need developers to adopt it and built on top of it.

The adoption of tech platforms is something we’ve seen countless times. We’ve seen it with everything from iOS and Android to Twilio and AWS. And every time, the common ingredient for success is developers. Here’s what Steve Ballmer has to say about this.

That said, developers don’t just appear out of the blue. They appear because the platform made a concerted effort to nurture the developer community. This is what led to adoption and real usage.

I used to be a Javascript developer and only recently have I started questioning why Javascript became the language of choice for web development. Looking at Javascript’s origin during the ‘dot com’ days and comparing it to where we are now helped me understand how the ecosystem around blockchain might evolve.

Evolution of a Programming Language

Javascript succeeded because it was light, easy to use, and integrated within Netscape (which, at the time, was the most popular web browser). This made it really easy for consumers to access web sites and developers to reach consumers. As more and more of these web apps got built, tools/libraries got more and more sophisticated. This attracted startups to build even more web apps and hire even more web developers. It became a virtuous cycle of adoption, a result of which was additional abstractions on top of Javascript.

As this virtuous cycle kept evolving, developers released open source libraries like jQuery, Mootools, etc., which abstracted a lot of manual functionality on top of Javascript and made it a lot simpler and easy to use.

By 2007, jQuery adoption exploded and many developers started to build jQuery plugins. These jQuery plugins are like “ready-made features” that developers can simply integrate instead of having to build a feature from scratch. Today, there are Javascript plugins for almost anything you can think of (calendars, email forms, sliders, etc.).

If we look at the web development ecosystem today, it is highly abstracted. Consumers don’t build directly with programming languages. They build with abstracted platforms. WordPress is a great example of this. WordPress powers more than 30% of all websites because it’s abstracted away the complexity of having to build and host a website. There’s even further abstraction on top of WordPress through all the themes and plugins that are readily available in the WordPress ecosystem.

Amazon’s Chief Evangelist, Jeff Barr, describes this abstraction on top of abstraction as the creation of a “platform for platforms”. In Barr’s post, he notes

“Amazon Web Services (AWS) is not only a rich platform to build solutions but also a platform for building specialized platforms. Customers can choose to either use the AWS cloud directly or take advantage of these value-added platforms” (Barr 2009).

Heroku and Engine Yard are two such examples of ‘value-added platforms’ that have abstracted away complexity, in their case they’ve made it super easy for developers to manage Ruby on Rails deployments on AWS.

This pattern of how a growing ecosystem expands through abstraction has been shown time and time again. It’s been shown that, as an ecosystem evolves, there will be further abstractions that allow for the facilitation of certain functionalities of those that came before it.

Evolution of Blockchain Protocols

This same pattern will emerge for Blockchain protocols — there will be abstractions up the stack that will facilitate the development of the underlying blockchain for certain verticals or niches. This is already starting to happen with 0x, Augur, etc. 0x is the ‘Ethereum for DEX’s’ and Augur is the ‘Ethereum for prediction markets.’ Now, if someone wants to build a decentralized exchange, he or she can use 0x instead of building one from scratch.

As these abstractions get more and more sophisticated, protocols will become thin as apps get fatter. This evolution will look something like what’s shown below.

Some of these abstractions may even abstract away so much complexity (think “Wordpress for Ethereum”), that users will flock to the abstraction instead of having to deal with the complexity of the base layer protocol. WordPress is a lot easier to use than learning web development, so people will obviously use WordPress. As blockchain protocols get more and more abstracted, protocols will start to lean out over time while the dApps will have the opportunity to capture more value.

In addition to this vertical abstraction, there’ll be horizontal abstraction. This will come in the form of interoperability. Interoperable blockchains — like Polka Dot and Cosmos — will make cross-chain transactions — transactions between two different blockchains from different protocols — possible. Imagine not being constrained to just one blockchain protocol. This would be a game changer. Interoperable blockchains are a game changer because they can essentially commoditize base layer protocols.

Just as we don’t care about Facebook or any other app’s backend, dApp users won’t care what protocol their favorite app is built on. Facebook users will continue to use Facebook regardless of whether it uses PHP or Ruby on Rails. Consumers only care about a seamless user experience. This might mean the dApp with the best user experience and lowest transaction fees (or even free transactions) will win the hearts of users.


A lot of investors believe in the fat protocol narrative. However, it’s unfair to compare the end of a sophisticated Web 2.0 to the beginning of a nascent Web 3.0. The blockchain ecosystem will evolve through both vertical and horizontal abstraction, ultimately making it a lot easier to develop and use.

We are early enough in the blockchain era that the infrastructure around protocols still needs to be developed. That said, we shouldn’t be ruling out dApps — there will be huge opportunities for them to create and capture value in a more mature version of Web 3.0.

Disclaimer. This post is intended for informational purposes only. The views expressed in this post are not, and should not be construed as, investment advice or recommendations. This document is not an offer, nor the solicitation of an offer, to buy or sell any of the assets mentioned herein. All opinions in this post are my own and do not represent, in any manner, the views of Decipher Capital Partners or affiliated companies.

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Fat Protocols and Value Capture Over Time (Part 1 of 2)

If you’ve been involved with blockchain, then you’re probably familiar with the Fat Protocol thesis in which Joel Monegro postulates about value capture in the blockchain era, Web 3.0. He notes that, in Web 2.0 (the social internet era), value accrued to the ‘application layer’ (i.e. in apps like Facebook, Google, Amazon, etc.). Meanwhile, the ‘protocol layer’ — HTTP, FTP, SMTP, etc. — captured little to no value.

Understanding Value Creation and Capture in Crypto

Most investors will tell you that one of the most important considerations when assessing investments is the idea of value – how it is created, how it is captured, and how it is conserved. This is true for all asset classes and blockchain is no different.

Deciphering Blockchain will be exploring the concepts of value creation and capture through the deconstruction of Joel Monegro’s ‘Fat Protocol’ Argument (original post and updated thesis).

We had fun discussing the Fat Protocol thesis and enjoyed how engaged the audience was that night!

Primer on Security Tokens

Our first post on Deciphering Blockchain is the audio recording and slides from our “Primer on Security Tokens” (link to presentation below) event held at ConnectionsSF on August 9, 2018.

We’ll go through what makes something a security, walk you through the process of issuing security tokens from the perspective of the entrepreneur, and lastly go through the implications of investing with security tokens from the perspective of the investor.

How Certain Are You That Your Utility Token Isn’t a Security?

I have argued that security tokens offerings (STOs) will be the new standard adopted by blockchain companies for raising capital. In essence, the invisible hand will push buyers of digital assets to invest in security tokens over utility tokens. Would Adam Smith cringe at the fact that a term he coined (pun intended; not going to point them out but more puns to come) back in the 1700s is being applied to crypto, or would he crack a smile at the fact that his brainchild is still very much lending a helping hand to those of us thinking through novel concepts such as the incentive mechanisms of blockchain ecosystems? He did, after all, demonstrate a propensity to adjust his world views.

The Argument for Security Tokens (Part 3 of 3)

Scenario (3): Developed Product; Existence of Security Tokens

Security tokens are an obvious answer to the “zombie network” phenomena. In this article, security tokens are defined as tokens that have equity-like characteristics. For example, if HouseChain issues 100 HouseSTs, and a person owns 10 of those, then he or she owns 10% of HouseChain and has 10% of the shareholder votes.

By insisting HouseChain raises capital through a security token issuance, cryptoinvestors are separating raising capital and the speculation associated with it from the product HouseChain is selling.

The Argument for Security Tokens (Part 2 of 3)

Scenario 2: Role of Utility Tokens in an Environment Where Security Tokens Do Not Exist and Blockchain Companies Have Developed Products

Fast-forwarding to the point when HouseChain has developed its decentralized short-term rental service, let’s analyze how purchasers of HouseCoins will use their tokens. This analysis assumes that HouseChain matured to a developed state without security tokens ever becoming the standard for raising capital (i.e., HouseChain issued HouseCoins, instead of HouseSTs, to raise capital).

The above assumption implies that a HouseCoin has two potential uses:

· Means for speculation

· Means of trade for goods or services

The Argument for Security Tokens (Part 1 of 3)

Scenario 1: Role of Utility Tokens in an Environment Where Security Tokens Do Not Exist and Blockchain Companies Have Yet to Develop Their Products

Originally, utility tokens were proliferated (not necessarily sold) across a wide set of users: founders, developers, prospective miners, members of the crypto community, and anyone else that was teach-savvy enough to have a cryptowallet. Early crypto enthusiasts pointed to network effects as to why this practice was necessary. If the network reached its critical mass of users (i.e., critical mass of token holders), then demand for the utility token would increase with minimal or zero user acquisition costs — in other words, the utility token would appreciate in value.

Security Tokens: A General Understanding

You probably have heard of or read in newspapers the words cryptocurrency or utility token when it comes to describing types of digital assets. Cryptocurrency implies desire to function as a currency — think of Bitcoin, Litecoin, Monero, or even the stablecoin DAI. As for utility tokens, my previous post explains what they are and how they are functioning within the cryptosphere.

Security tokens are another type of digital asset, or what I like to call a cryptoasset, that have been garnering quite a bit of attention lately.