Original Author: Mike Cagney, Founder of Figure
Original Source: Pantera Capital

Translation: Zhou, ChainCatcher

Blockchain lending company Figure IPOed and went public on September 11, with its stock price soaring as much as 44% on the first day, reaching a market capitalization of around $7.8 billion; closing the day with a total market cap of $6.5 billion.

This article is a public letter from Figure's founder, Mike Cagney, regarding the IPO:

At the end of 2017, I had my "aha" moment on the blockchain. While serving as CEO of SoFi, I used to spout some platitudes about Bitcoin, and even the broader blockchain—"It will change financial services!"—but I didn't really know how. This time was different.

If you ask any full-stack engineer, most would prefer not to develop on the blockchain: it's slow, cumbersome, and due to its tamper-proof nature, has very low fault tolerance. But the blockchain has a superpower—replacing trust with truth.

Financial services have been and still are built on trust. This type of market requires numerous intermediary steps: between a public stock trade, there can be up to seven intermediaries involved; in a debit card transaction, there could also be five parties involved. Many mega-cap companies have been built around this rent-seeking behavior. Blockchain has the ability to condense these multi-party markets into just two: buyer and seller. All rent-seeking opportunities will disappear.

Blockchain can do more than just disrupt existing markets. By putting historically illiquid assets (such as loans) and their performance history on-chain, blockchain can bring liquidity to these markets that has never existed before. This liquidity, combined with the ability to truly digitize and control assets, will open up financing opportunities that were previously out of reach. The disruptive opportunities brought by blockchain are significant, but the untapped opportunities it creates are even greater.

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

Figure: Reshaping the Capital Market with Blockchain

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

2018 was the year of the ICO (Initial Coin Offering), where crypto companies seemed to continuously raise funds by selling tokens. We chose a different path. We believed that we could originate, aggregate, and tokenize loans on the blockchain, thereby saving up to 85 basis points (bps) in transaction costs. We took this idea to the banks, and they all said, "Great! We love it! We'd be the 10th bank to do this..." Clearly, this was not a "build it and they will come" situation—just building the system wasn't enough to attract participants.

Having worked in leading lending businesses at SoFi, we weren't excited about building another lending institution from scratch, but we also recognized the need to prove to the market that blockchain was 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 a blockchain twist. 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 origination giants. We needed time to convince both buyers and sellers to adopt this new technology.

Soon, we expanded this model to B2B2C. Today, over 168 third parties are using our technology to originate loans on-chain, including half of the top 20 retail mortgage lenders. Recently, we opened up the blockchain-native capital market for these originators: leveraging our technology, they can directly sell (and soon finance) assets in a bilateral manner to the blockchain capital market without Figure as an intermediary.

In 2020, we completed the industry's first blockchain-native consumer loan securitization; in 2023, we achieved the industry's first AAA-rated securitization. Since launch, we have originated over $15 billion in on-chain loans and facilitated over $50 billion in on-chain transactions. We are the largest player in on-chain RWAs, and no one has caught up yet.

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

Blockchain and the Capital Market

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

By putting native digital assets (such as loans) on-chain, lenders can perfect their collateral rights (for example, through Figure's digital asset registry technology, DART) and obtain control. Lenders can directly assess the collateral's liquidity, volatility, and advance rate to determine risk, rather than just extending credit to the borrower. When we directly connect the capital supply side with the usage side, we can construct a Pareto-efficient market: both lenders and borrowers benefit because they no longer bear the inefficient costs of capital allocation and other intermediaries. We first applied this decentralized (DeFi) approach to our crypto exchange to provide margin finance, 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 finance with our own assets.

We have always believed that DeFi will ultimately become the mainstream way of asset financing, and recent legislation is accelerating this. After the passage of the GENIUS Act, the U.S. Treasury Department pointed out that trillions of dollars could flow into U.S. Treasury bills through stablecoins. This funding will primarily come from bank deposits. The outflow of $1 trillion in bank deposits in 2022–2023 almost caused the financial system to malfunction. If the Treasury Department's scale and path assessment is correct, there must be new things to fill the gap. We believe that is DeFi, and we are leading the way in the RWA field.

The "Endgame" of Blockchain

We believe that the value proposition of blockchain can be extended to all asset classes. Taking public stocks as an example, besides trading efficiency and liquidity, the most significant improvement in blockchain may currently be in financing. Imagine a scenario where you can seamlessly cross-collateralize stocks with other non-equity assets to obtain leverage, or have the investor themselves directly control and earn the economic benefits of lending out your stock. Blockchain is the equalizer in the financial arena. We were the first to do lending on-chain, and next, we hope to lead in bringing new asset classes (such as stocks) onto the chain.

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

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