Are the NFT and DeFi markets recreating traditional human hierarchies through new social capital?
There’s a big difference between belonging to a community that you simply like, and a community that will make you *rich*. Fintech is something some people are interested in, but crypto is something that can make people rich.
There is also a big difference between a community that is growing and starting to deliver its benefits, compared to one that already has given them out and cemented its hierarchical structure, and is protecting the distributive outcome.
Finally, there is a sharp, core distinction between human nature and its social DNA, and the issues around quality of life, median income, longevity and health outcomes.
It is through this lens that we want to approach the funding and growth of three recent unicorns — Jumio, Feedzai, and Chainalysis — and tie their function to the community activity we see in the quickly-expanding NFT sector.
As an anchor, Jumio just raised $150 million for software that helps enterprises (e.g., like banks) confirm the identities of over 300 million customers around mobile payments and onboarding use-cases, generating $100 million in revenue. That’s a SPAC target if we ever saw one, despite its checkered history with bankruptcy. Jumio’s software watches you interact with the accounts of firms like HSBC, Monzo, and others through AI and biometrics. It is the gatekeeper of the banking community.
The second company, Feedzai, does fraud checks at the account opening and payment transaction layer, as well as helps with AML using machine learning. It just raised $200 million at a $1B+ valuation, and safeguards Citibank, Fiserv, Santander, SoFi and Standard Chartered’s Mox. A big robot cop making sure that the flows of economic exchange inside the banking system are not destructive to community participants.
Our third example is Chainalysis, the crypto-ecosystem mapping firm that helps institutional actors like government, asset managers, and banks interact with blockchain-based digital assets. The firm just raised $100 million at a $2 billion valuation. The company doesn’t position itself around solving “fraud” or other scary words used in the traditional regtech industry. Rather, Chainalysis tells a story about making blockchain networks trusted by the incumbent system, thereby bringing a benefit to blockchain-based projects. We wonder whether this is positioning for its clients, or the networks it monitors.
So what do these compliance firms — valued now in the billions — have to do with Bitcoin laser eyes and NFTs? What do the have to do with human nature? Let’s get to it.
The Distribution of Social Capital
A lot of the language in fintech and Ethereum has been about democratization, and helping people have better financial services. Some of that is well meaning and true. And yet the reality is often different. We continue to create outcomes with high Gini coefficients that accrue the most value up a power pyramid. Someone will be first to lay the railroads, deploy a blockchain, or buy up the valuable NFTs.
Tough news. This is the nature of the human animal organized in a tribe.
No matter what time period you take, you get a distributive outcome that feels unequal to someone. Below is a series of charts plotting an inequality index across three different time periods with a spread of countries and GDP per capita on a log scale. While there is some variation as incomes go up, the simple nature of things is that unequal distributions are part of the nature of our groups — whether they are countries, companies, or online communities.
Simplistically, generation of incomes and wealth is some sort of transformation function on the particular attributes of an individual agent, randomly placed within the community population: f(environment, DNA) = $$$. The function itself is wobbly and complicated, as is the impact of the environment. For example, being randomly placed into an early industrial society where your probability of being a proletariat is high likely results in a low chance of wealth accumulation regardless of your other attributes.
You could alternately be placed in a society where everyone is a farmer for one feudal lord, and mostly everyone else is a peasant. Or you could be in our current society, where the requisite tools for creativity and production are widely distributed, but returns to capital are massive through high technological, social, and capital leverage.
We found this discussion of the economics of OnlyFans, an adult content site, to be eye opening: “The top 1% of accounts make 33% of all earnings. The top 10% of accounts make 73% of all earnings.” This is not a regulated outcome, but a rule of human systems without redistribution safety nets. You will discover the same charts for Substack, TikTok, YouTube, Spotify and any other productive medium.
One argument is that by offering more people access to various banking and financial services, opportunity increases. This is absolutely true. However, that does not mean opportunity of outcomes equalizes. Nor should it, as people do not all create equally, and therefore should not be rewarded as such. There is also emerging research that financialization helps in the beginning, as basic services become available to all, but that increasing financial sector activity beyond that creates rent-seeking and create further inequality.
It is strongly true that people are on average better off, being more healthy and well off financially, when considering the historic time scale. Our life expectancy has risen from 35 years to nearly 80 years, infant mortality has been reduced if not eradicated, and median GDP per capita keeps rising across the world.
That doesn’t change human nature. Social hierarchy has so far been a zero sum game.
This is because even if everyone is healthy and wealthy, status in human societies is relational. And while money is one form of accounting for sorting people by status, it is increasingly less differentiating at the meta-game of the Internet. That comment may seem insensitive to the many people struggling to make ends meet financially, which for Americans is a large portion of the population. And yet, it is also accurate and explains the status seeking games represented by start-up investing or NFT markets.
Other forms of social capital are just as valuable — from wielding political power in a governing body (e.g., AOC), to the million of followers an influencer can command (e.g., Beyonce), to the voice of a self-organized decentralized community (e.g., Vitalik, Andre Cronje). An owner of a rare CryptoPunk, or a bodybuilder winning Mr. Olympia would find money to be a very imperfect measurement for the thing they own or have achieved.
The frontiers of new economies and NFT markets
We’ve worked in fintech and finance for a while. And one learning is to listen more closely to what people are talking about, and where they are talking about it. Very few people were discussing the ins-and-outs of investment banking economics and deal making on Internet forums; rather most of that discussion and information stayed behind closed doors. Access to this is what made working at an investment bank valuable.
Fintech opened things up a bit, but we still see most of the community — whether on Twitter, LinkedIn, or elsewhere — behave in a private way, describing “successful” outcomes instead of their daily process. Fintech celebrates results post-mortem. It does not spill out emotions and rewards into the wild unknown, desperate in attention. Fintech founders do not know how to bleed on camera.
Crypto and DeFi is a thousand times more popular, because it has an animating conversation behind it. The idea of social collapse and blockchain rebirth generates attention, outrage, and speculation. The building of software and primitives happens in the open, with auditable code and soap opera personalities feuding on social media. It is not just a financial vector — it is the drama giving meaning to the life of its builders and users.
The NFT world — and by association the art, music, and media communities — are taking this up another ten fold. We’ve never seen as much engagement on DeFi as we do on Twitter posts asking artists to recommend their NFTs to collectors. These viral outcomes are derived entirely out of the artist’s journey, contextualized by the communities in which they are doing the performative creating. Relationships here are also highly asymmetric — with curators, galleries, music labels, and producers wielding large power over the people producing the work.
This squeezes out human emotion at scale onto the blockchain canvas.
Take for example this simple tweet of a project giving away digital cards made by NFT artists that have been deemed valuable by the community. It has nearly 1,000 likes and retweets. What Fintech or DeFi giveaway would generate this level of engagement?
Giveaway time! We are giving away some packs to some very lucky followers! Just RT, Follow & visit kolectiv.ggto enter! #NFTs #NFTdrop #nftcollector #NFTcollectibles #NFTGiveaway
March 21st 2021
911 Retweets754 Likes
In a fantastic piece on NFT value capture here, Coopahtroopa highlights what the emerging industry structure for NFTs currently looks like. In particular, it becomes apparent that the gatekeeping of curation is what allows some creators to be massively valuable ($500,000 per piece) and others to be entirely unknown despite technically capable work. A transfer of social reputation and approval to a particular narrative from an artist — who, as we mentioned is publicly bleeding out on social media daily — will be a step function improvement for their commercial value.
Such curation can be earned organically through community engagement, or through a fortuitous selection that elevates a lone voice into a prophet.
The pace at which *types* of social capital are created and destroyed appears to be accelerating. It is then this turnover that we should meditate on. As new spaces open up — like DeFi, NFTs, and crypto more generally — so does the social hierarchy that ranks participation within these communities. A proliferating web of Telegram and Discord channels hold the promise of precious information on drops, launches, and yield farming “alpha drops”. From afar, it looks like a race to acquire status, through the purchase of expensive digital objects or the early stage support of and access to particular DAOs.
This is a re-shuffling of the type of status one acquires in the traditional economy — the signals of schooling, large company jobs, and other markers of success that now face extinction in a digital-first world. If future generations de-value university degrees over lived experience and social media followings, that is one thing. It is yet another thing if social capital acquisition has far higher turnover as a *rule*, such that relationship structures are constantly built, destroyed, and built anew.
We do not yet know which of these it will be.
The Gatekeepers at play
We started this discussion with Jumio, Feedzai, and Chainalysis.
Their services segment individuals and their transactions into “safe” and “unsafe”, allowing some people to open accounts and participate in the economy, and filtering out others as barbarians at the gate.
If we treat the incumbent economy as one largely-settled social hierarchy system, we can then understand that identity and KYC/AML services are there to block unwanted disruption to that hard-won hierarchy. They are a symptom of stability and preservation for banks and economic, self-deterministic nation states. Having Jumio or Feedzai scan your face and present a state-issued identification document in order to open an account, or having Chainalysis show that the flow of crypto money is “safe” according to traditional regulation, is not that different from NFT owners proving they belong to the crypto community.
We do worry that the crypto community — which has started out with language around inclusivity and democratization — is now relying on the ownership of $1MM+ digital objects to function as a proof of trust for future participation. Does crypto citizenship have to cost this much?
And then, is it any different from American citizenship and the processing to get its passport? Citizenship grants rights to use the services of the community, and creates obligations of taxation and broader communal support. Crypto governance mechanisms to date are different and more libertarian in nature, but we should be careful to watch how they evolve.
There’s no getting away from the animal spirits.