Figure Founder’s Letter: DeFi Will Eventually Become the Mainstream Method for Asset Financing as the First RWA Stock

Blockchain has completely reshaped how assets are originated, traded, and financed. This is not a “putting lipstick on a pig” style fintech makeover of old things, but an entirely new capital markets ecosystem.

Written by: Mike Cagney

Translated by: Zhou, ChainCatcher

Blockchain lending company Figure went public on the US stock market on September 11, with its share price soaring as much as 44% on the first day of trading, reaching a market capitalization of approximately $7.8 billions; it closed with a total market cap of $6.5 billions. 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. When I was CEO at SoFi, I would often say things about bitcoin and, more broadly, blockchain—“It will change financial services!”—but I didn’t really know how it would change things. This time, it was different.

If you ask any full-stack engineer, most will say they’d rather not develop on blockchain: it’s slow, cumbersome, and due to its immutable nature, has very little room for error. But blockchain has a superpower—it replaces trust with truth.

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

Blockchain can do more than just disrupt existing markets. If historically illiquid assets (such as loans) and their performance history are put on-chain, blockchain can bring unprecedented liquidity to these markets. This liquidity, combined with the ability to achieve true digital completeness and controllability of assets, will open up financing opportunities that were previously inaccessible. The disruptive opportunities brought by blockchain are significant, but the opportunities it creates for further development are even greater.

This was my “aha” moment. You can create native digital assets, and everyone can know the true ownership, composition, and history without relying on trust. Assets can be traded in real time, bilaterally, with no counterparty or settlement risk. Lenders can instantly and truly achieve complete digital control over collateral. Blockchain has completely reshaped how assets are originated, traded, and financed. This is not a “putting lipstick on a pig” style fintech makeover of old things, but an entirely new capital markets ecosystem. I hope to be at the forefront of driving this transformation.

Figure: Reshaping Capital Markets with Blockchain

At the beginning of 2018, I co-founded Figure with my wife June Ou and several like-minded partners. Figure’s goal is simple: to change capital markets with blockchain. To achieve this, we had to bring a real, measurable use case to the market.

In 2018, some crypto companies raised funds by selling tokens. We chose a different path. We believed we could originate, aggregate, and securitize loans on blockchain, saving up to 85 basis points (bps) in transaction costs. We took this idea to banks, and they all said: “Great! We love it! We’d love to be the 10th bank to do this…” Clearly, this was not a “build it and they will come” situation—just building the system wouldn’t make people come on their own.

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

Soon, we expanded the model to B2B2C. Today, more than 168 third parties use our technology to originate loans on-chain, including half of the top 20 retail mortgage institutions. Recently, we opened up the blockchain-native capital market to these originators: with our technology, they can sell assets directly to (and soon finance from) the blockchain capital market in a bilateral manner, 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 launch, we have originated over $15 billions in loans on-chain and completed more than $50 billions in on-chain transactions. We are the largest participant in the public blockchain RWA space, and no one has caught up to us yet.

In 2018, most mainstream blockchains were based on PoW (Proof of Work). PoW does present challenges for financial services: cost, speed, and most importantly, predictability. PoS (Proof of Stake) was just emerging at the time and could better address these issues. After a failed 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 and is crucial to our push for institutional adoption.

Blockchain and Capital Markets

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

Putting native digital assets (such as loans) on-chain allows lenders to perfect their security interests (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 judge risk, rather than just granting credit to borrowers. When we connect the supply and demand sides of capital directly, we can build a Pareto-efficient market: both lenders and borrowers benefit because they no longer bear the inefficiency costs of capital allocators and other intermediaries. We first applied this decentralized (DeFi) approach to our crypto exchange to provide secured financing, and recently brought Figure’s loans into our DeFi lending market—Democratized Prime. Just as we did on the trading/liquidity side, 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 for asset financing, and recent legislation is accelerating this process. After the passage of the GENIUS Act, the US Treasury pointed out that trillions of dollars could flow into US Treasury notes via stablecoins. These funds will mainly come from bank deposits. In 2022–2023, the outflow of $1 trillion in bank deposits nearly crippled the financial system. 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 blockchain’s value proposition can extend to all asset classes. Take public equities, for example: beyond trading efficiency and liquidity, blockchain’s improvements in financing may be the most significant right now. 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 out their stocks. Blockchain is the great equalizer in the financial arena. We pioneered on-chain lending, and next, we hope to lead in bringing new asset classes (such as equities) on-chain as well.

Just as Web 2.0 today has seven giant stocks, I believe Web 3.0 will also have a set of peer companies representing blockchain technology. Our IPO brings us closer to becoming a leader among this peer group. Even though we have built a profitable and rapidly growing blockchain-based company in an extremely stringent regulatory environment, we remain highly optimistic: regulatory changes and public market acceptance of blockchain will, in the coming years, drive the entire industry and its opportunities. The IPO is just one step in the long process of bringing blockchain into every aspect of capital markets.