RWA First Stock Figure Founder Letter: DeFi will eventually become the mainstream method of asset financing

Original Author: Mike Cagney

Compiled by: Zhou, ChainCatcher

Blockchain lending company Figure went public on September 11 and listed on the U.S. stock market, with its stock price rising by as much as 44% on the first day of trading, giving it a market capitalization of approximately $7.8 billion; the total market cap at closing was $6.5 billion. This article is ** an open letter from Figure founder Mike Cagney regarding the IPO:

At the end of 2017, I had my "aha" moment with blockchain. While I was CEO at SoFi, I often made grand statements about Bitcoin and the broader blockchain—"it will change financial services!"—but I didn't really understand how it would change. This time, it was different.

Ask any full-stack engineer, and most will say they would rather not develop on blockchain: it's slow, cumbersome, and due to its immutable nature, has very low fault tolerance. But blockchain has a superpower—replacing trust with truth.

Financial services have always been, and still are, trust-based markets. Such markets require a lot of intermediaries: between a public stock trade, there can be up to seven intermediaries; a debit card transaction might involve five parties. Many large-cap companies are built around this rent-seeking behavior. Blockchain has the ability to condense these multi-party markets into just two parties: buyers and sellers. All rent-seeking opportunities will disappear.

Blockchain can do more than just disrupt existing markets. If we put historically illiquid assets (like loans) and their historical performance on-chain, blockchain can bring liquidity to these markets that has never existed before. This liquidity, combined with the ability to achieve true digital completeness and control over assets—will open up financing opportunities that were previously unreachable. The disruptive opportunities brought by blockchain are significant, but the opportunities it creates for development are even greater.

This is my "aha" moment. You can create native digital assets where everyone can know the true ownership, composition, and history without relying on trust. Assets can be traded in real-time, bilaterally, without counterparty risk or settlement risk. Lenders can achieve immediate and true digital completeness and control over collateral. Blockchain fundamentally reshapes how assets are originated, traded, and financed. This is not a "lipstick on a pig" fintech transformation of old things, but a completely new capital market ecosystem. I hope to be at the forefront of driving this change.

Figure: Reshaping Capital Markets with Blockchain

In early 2018, I co-founded Figure with my wife June Ou and several like-minded individuals. The goal of Figure is simple: to change capital markets with blockchain. To achieve this, we must bring a real, measurable use case to market.

2018 was the year of ICOs (Initial Coin Offerings), and it seemed that crypto companies could continuously raise funds by selling tokens. We chose a different path. We believed we could originate, aggregate, and securitize loans on the blockchain, saving up to 85 basis points (bps) in transaction costs. We took this idea to banks, and they all said, "That's great! We love it! We want to be the 10th bank to do this…" Clearly, this was not a case of "you build it, they will come"—just building the system wouldn’t bring anyone in.

After leading a market-leading lending business at SoFi, we were not excited about recreating another lending institution, but we realized we had to prove to the market that it would be better on blockchain. In 2018, we became one of the first teams to originate consumer loans on-chain. Figure started as a direct-to-consumer loan originator, simply replacing the foundation with blockchain. We chose Home Equity Line of Credit (HELOC) as our first product because we felt no one was efficiently originating it (greenfield), and we didn’t want to immediately compete head-on with large consumer loan or mortgage giants; we needed time to persuade both sides of the market to adopt this new technology.

Soon, we expanded our model to B2B2C. Today, over 168 third parties use our technology to originate loans on-chain, including half of the top 20 retail mortgage institutions. Recently, we opened up blockchain-native capital markets for these originators: with our technology, they can sell assets bilaterally directly to (and soon also finance) blockchain capital markets, without Figure acting as an intermediary.

In 2020, we completed the industry's first blockchain-native consumer loan securitization; in 2023, we completed the industry's first AAA-rated securitization. Since our launch, we have originated over $15 billion in loans on-chain and completed over $50 billion in on-chain transactions. We are the largest participant in the RWA space on public chains, and no one has been able to catch up.

In 2018, most mainstream blockchains were based on PoW (Proof of Work). PoW does face challenges in financial services: cost, speed, and most importantly, predictability. PoS (Proof of Stake) began to rise at that time, better addressing these issues. After a misjudged experiment with a quasi-permissioned chain, June and her team built and launched Provenance Blockchain. Provenance is a public, PoS decentralized blockchain. Figure does not control Provenance, although we hold 20% of the utility token $HASH and continue to support the protocol's development. Provenance was built for financial services, which is crucial for us to drive institutional adoption.

Blockchain and Capital Markets

We believe that blockchain brings three core values to capital markets. The first is at the transaction level—reducing costs associated with auditing, quality control, third-party verification, etc.; we have already benefited significantly in this area. The second is liquidity—supporting a 7×24 hour, real-time bilateral market. We and our partners are building such a greenfield loan trading market. Finally, financing, which we believe is the greatest value.

Bringing native digital assets (like loans) on-chain allows lenders to perfect their collateral rights (for example, through Figure's digital asset registration technology, DART) and gain control. Lenders can directly assess the liquidity, volatility, and advance rates of collateral to gauge risk, rather than just extending credit to borrowers. When we connect the supply side of capital directly to the usage side, we can create a Pareto-efficient market: both lenders and borrowers benefit because they no longer bear the inefficient costs of capital allocators and other intermediaries. We first applied this decentralized (DeFi) approach to our crypto exchange to provide guaranteed financing, and recently introduced Figure's loans into our DeFi lending market—Democratized Prime. Just as we have done at the trading/liquidity level, we are demonstrating the power of DeFi in financing with our own assets.

We have always believed that DeFi will eventually become the mainstream method of asset financing, and recent legislation is accelerating this process. After the passage of the GENIUS Act, the U.S. Treasury pointed out that trillions of dollars could flow into U.S. Treasury bills through stablecoins. This funding will primarily come from bank deposits. Between 2022 and 2023, the outflow of $1 trillion in bank deposits nearly caused the financial system to fail. If the Treasury's judgment on scale and path is correct, something new must fill the gap. We believe that is DeFi, and we are leading the way in the RWA space.

The "Endgame" of Blockchain

We believe that the value proposition of blockchain can extend to all asset classes. Take publicly traded stocks as an example; beyond trading efficiency and liquidity, the improvements in financing that blockchain can bring may be the most significant at present. Imagine a scenario where you can seamlessly cross-collateralize stocks with other non-equity assets to obtain leverage; or where investors themselves directly control and earn the economic benefits from lending their stocks. Blockchain is the equalizer in the financial arena. We were the first to do lending on-chain, and next, we hope to lead the way in bringing new asset classes (like stocks) onto the chain.

Just as Web 2.0 has seven tech giants today, I believe Web 3.0 will also have a set of companies representing blockchain technology at the same level. Our IPO brings us closer to becoming a leader in this peer group. Although we have built a profitable and rapidly growing blockchain-based company under extremely stringent regulatory conditions, we remain very optimistic: regulatory changes and the public market's acceptance of blockchain will drive the entire industry and the opportunities within it in the coming years. The IPO is just one step in the long process of bringing blockchain into every aspect of capital markets.