How Goldman Sachs Deploys Blockchain

With the continuous development of blockchain technology, blockchain has had a great impact and impact on the financial field. In the early days, traditional banks such as Goldman Sachs and JPMorgan Chase were not optimistic about the prospects of blockchain. However, with the passage of time, traditional banks have all entered the market to deploy related businesses. For example, JPMorgan Chase has made frequent big moves. So what are the layouts of Goldman Sachs, a traditional investment bank, in the blockchain field? What is the concept of blockchain today?

Goldman Sachs builds blockchain trading platform

On August 22, 2022, The Wall Street Journal stated that Goldman Sachs has been using the Ethereum network to trade bonds and process transactions for clients for some time. In 2021, Goldman Sachs helped European investment banks arrange a bond issuance of US$100 million. The bond is registered in France and processed using a self-built platform on Ethereum. The physical bond sale, which originally took about five days, was completed in just one hour. The high liquidity also helped customers to have more flexible capital turnover. In addition, because of the nature of the blockchain, the risk of fear of adversaries sabotaging completed transactions is reduced. The Wall Street Journal said that currently blockchain-related technologies are all in charge of Goldman Sachs’ digital asset division.

Mathew Mc Dermott, Global Director of Goldman Sachs' Digital Assets Division, is currently responsible for leading about 70 employees who are committed to enabling Goldman Sachs to use blockchain technology and legality to bring profits. Interestingly, Mathew Mc Dermott had a relatively bad impression of blockchain before. However, with the maturity and popularization of blockchain technology, many investment banks have used blockchain technology to build their own trading platforms.

Mathew Mc Dermott said that in the next 5 to 10 years, the financial system will develop such that all assets and liabilities are generated natively on the blockchain, and all transactions will take place on the chain. Due to the characteristics of the blockchain, migrating transactions, etc. to the blockchain platform will greatly improve the efficiency, including the issuance of bonds, asset securitization and the generation of loans. Basically, the ecology of the digital financial system can be very well adapted to the blockchain platform.

The Wall Street Journal said that although Goldman Sachs is reluctant to disclose how much resources it has invested in the digital asset division, what is certain is that Goldman Sachs’ vision is to create a trading platform that can serve itself and its clients, and may also be used by other banks.

On August 23, 2022, Goldman Sachs publicly stated that it will build a new system based on blockchain technology for transactions, which will run faster, cost less and be more profitable. Goldman Sachs said that the adoption of blockchain technology on the trading platform may reduce trading risks, and the system will help securities issuers to track the holders of assets such as stocks.

Goldman Sachs' investments in blockchain

In June 2021, Goldman Sachs participated in a $28 million Series A investment in blockchain infrastructure provider Blockdaemon. This round of investment was participated by Greenspring Associates, BlockFi, Support, Voyager Digital, and Illuminate Financial. The financing also brings Blockdaemon's valuation to $5 billion. Blockdaemon provides blockchain services that allow users to trade with leverage.

Konstantin Richter, CEO and founder of Blockdaemon, said the funding is an important milestone for Blockdaemon. With investment from industry-leading financial technology providers and venture capital firms, this funding round will enable Blockdaemon to further expand Blockdaemon's node infrastructure services, add to Blockdaemon's growing team, and strengthen Blockdaemon's presence in emerging markets around the world, while simultaneously Deepen Blockdaemon's existing strategic relationships with global financial institutions. Blockdaemon provides its clients with a "simplified" gateway into the blockchain industry and provides tools for "scalable operations," the latter of which may be of particular interest to Goldman Sachs.

Blockdaemon allows institutional clients such as Goldman Sachs to own and deploy nodes, and the company provides a secure, scalable and relatively reliable service. Through Blockdaemon’s services, companies can access Ethereum’s Beacon Chain (Eth 2.0), Bitcoin and its Lightning Network, Cardano, Polkadot, Cosmos, and more.

Oli Harris, head of digital assets for North America at Goldman Sachs, said blockchain is a key driver of innovation in the financial services industry, and Blockdaemon is powering its infrastructure. Goldman Sachs is excited to join them as they can provide institutional-grade blockchain technology.

In addition to Blockdaemon, Goldman Sachs has invested in crypto research firm CoinMetrics. On May 6, 2022, crypto data analytics company Coin Metrics announced that it has completed a $15 million Series B round led by Goldman Sachs. Goldman Sachs managing director Mathew McDermott and its head of blockchain and crypto scaling will join Coin Metrics Board of Directors. Mathew McDermott said Goldman invested in CoinMetrics because data is critical to mainstream crypto adoption.

Other investors include existing investors Castle Island Ventures, Highland Capital Partners, Fidelity Investments, Avon Ventures, Communitas Capital, Collab+ Currency, Acrew Ventures, Morningside Group, BlockFi and Warburg Serres Investments. Coin Metrics said the financing will accelerate the company’s global expansion and enable further product innovation.

In June 2021, Goldman Sachs invested 54 billion won (about 310 million yuan) in South Korea's KCOIN. KCOIN is a cryptocurrency that can be used like cash, and can be used to pay for online shopping malls and offline franchise stores, communication fees for the three major domestic news agencies, gas fees, national pensions, and health insurance fees. As long as you log in to the mobile chat APP called KTALK, users can accept KCOIN or give KCOIN to each other, and can pay for electronic commodity coupons.

Goldman Sachs Involves Digital Currency Derivatives

In fact, in 2018, Goldman Sachs launched a bitcoin-related service to clear bitcoin derivatives for clients. However, the service window was closed by Goldman Sachs not long after.

In June 2021, Goldman Sachs partnered with crypto investment giant Galaxy Digital (a New York-based cryptocurrency financial services provider owned by billionaire Mike Novogratz) to launch a bitcoin futures trading product for clients. Galaxy Digital positions the company as a bridge between traditional financial companies and cryptocurrency trading companies, mainly helping Goldman Sachs clients such as large hedge funds and institutions invest in Bitcoin.

In March 2022, Goldman Sachs partnered with Galaxy Digital’s trading arm to execute their first over-the-counter (OTC) cryptocurrency trade. The product Goldman bought at the time was a non-deliverable option based on Bitcoin, that is, Goldman bought a contract betting on the future price of Bitcoin, rather than actually buying the cryptocurrency spot.

On April 29, 2022, Goldman Sachs offered its first bitcoin-backed loan, the first time Goldman Sachs has lent cash against borrowers’ bitcoins. Goldman said the deal was particularly interesting due to factors such as its structure (consisting of bitcoin and cash) and 24-hour risk management. The Goldman Sachs loan allows bitcoin holders to advance bitcoin as collateral with banks to borrow in fiat currencies such as the US dollar. However, some have pointed out that this loan may be risky due to Bitcoin’s potential volatility, i.e. if the price of Bitcoin falls too much, borrowers may be asked to increase their collateral or they risk being liquidated.

Goldman Sachs' view on blockchain

In December 2021, Goldman Sachs released a report stating that blockchain and encryption technology will become the core of the virtual world, as it will allow people to securely own digital items in different virtual worlds. Goldman Sachs calls blockchain one of the most disruptive technology trends to emerge since TCP/IP and HTML were “introduced to the internet in the 1990s.”

Goldman Sachs said in the report that blockchain technology is bound to be at the heart of the development of the Metaverse, as it allows users to securely own assets or items and transfer them to different platforms without the need for permission from a central party. For example, The Sandbox runs on the Ethereum encrypted network, which enables users to buy and sell in-game land and NFTs (digital products, etc.) on exchanges outside the metaverse, such as OpenSea. If any virtual goods or services cannot be moved with users from one space to another, Goldman believes they may be of limited value. As far as the metaverse is concerned, blockchain is the only technology Goldman sees that can uniquely identify any virtual object independently of a central authority. This ability to identify objects and then track ownership is critical to the ultimate function of the metaverse. Goldman Sachs believes that blockchain allows "partial removal of centralized control", such as the ability for users to log in to any platform or application without requiring third-party authentication (such as Meta, Google or Apple).

Goldman’s report is generally bullish on blockchain, although it says it’s too early to develop a clear investment strategy around it.

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