Fireside Chat: Tokenized HELOCs and Onchain Credit with Reid Simon and David Hoffman

Transcript

[applause] >> Uh Rita, my and I think most people's first exposure to Figure is your guys's token that is the number ninth most largest token in crypto by market cap. How did Figure get onto the top 10 of crypto assets? >> Sure. So, Figure sort of started building a a bit in the dark in the sense that they built a tokenization platform for HELOCs, sort of an esoteric asset in consumer credit.

And the number's real. So, we do about today about a billion and a half a month of new natively tokenized HELOCs on the Provenance network. And then we started to care about how can we reach out to other chains and other ecosystems permissionless liquidity. And that was sort of the the key metric that no one was recognizing was sure Biddle is a great product, it has a huge TVL, but no one actually sees because there's not a lot of people that necessarily use Provenance every day the the real volumes. So, we worked with CoinGecko to mirror the TVL number on Provenance. And so, the number is is verifiable. You can there's truth in it. But yes, it it I

think it's the number nine asset now. >> Can you just quickly do a just a 101 of the Figure business just to set the stage for all the questions we're going to ask you next? >> So, our founder Mike Cagney is also the founder of SoFi. And SoFi sort of really built out the direct to consumer lending business in in the US. And he had an idea which was we could operate this business infinitely more efficiently, cheaper, and faster if it was built on blockchain. So, you know, you can think of the Figure as a lender. And when we started the business, we were a lender. So, when we originated HELOCs, they were our capital off our balance sheet. Today, we work with about 380 different partners that plug into sort of our tech stack that

lives on Provenance to do origination of HELOCs, credit decisioning, tokenization, trading of HELOCs, warehousing of HELOCs, and securitization of HELOCs. And so, if you think of HELOC is sort of like one asset on the platform, we do auto loans, we do residential transition, we've got SMB, inventory finance, so a whole host of credit assets. You can think about Figure's built to TradFi components that are necessary to operate on chain, and we've got the full stack. >> Yeah, so I think the the first um first generation of tokenized real-world assets are companies like uh Tether to issuing USD uh usually issuing USD, but they also issue gold, uh and that was

it. Uh Tether's like, "Here are dollars, here is gold." And that was that was been kind of the first generation of real-world uh tokenized assets on blockchains. Uh you guys all do the whole ancillary set of services beyond that, and you're bringing everything on chain because it's just like incomplete. It's like not uh the just tokenizing HELOCs is just one piece of the puzzle, and you guys are are doing everything. Maybe we could talk about um what bottleneck opens up for Figure when you put things on chain cuz you guys were already a successful business prior. So, strategically, what what aperture aperture opens up when you guys tokenize things on chain?

>> Yeah, so I think I think there's probably two ways to look at this. The first is um why did Figure pick HELOC as an asset? It's a weird sort of seemingly esoteric asset. Um well, the reality is if you've bought a house in the US, the mortgage process is quite difficult, it's expensive, and it takes a really long time. So, maybe 2 months, a lot of paperwork going back and forth, but ultimately for the bank to originate that loan, it cost somewhere around 11 or 12,000 dollars. So, when you think about, okay, what is the size of the loan and the interest rate need to be for the bank to then make that profitable, it's quite high. So, historically, if you wanted Let's say you own a half a million dollar house, you owned it outright, and you wanted to take, you know, a 20,000 dollar loan

against that equity, um a bank would not give it to you because they can't make money on that loan. So, kind of the core um holy grail of blockchain technology was cheaper, faster, quicker. And so, that unlocked sort of the HELOC that we provide because banks couldn't provide it uh um economic The banks couldn't provide it uh profitably before. And then I think the second thing is, um once you've tokenized that asset, right, you have to have a reason for tokenizing it. So, utility or some better economic outcome. And so, for us, we had to build all of these other properties that would function as a whole platform to service utility and economics for that asset.

So, if you look at Democratized Prime, which is sort of our flagship product, um you can think of it as uh sort of like a borrow-lend market against these AAA rated HELOCs. Uh so, it pays about 6 and 1/2 percent um with hourly liquidity. Um and when we connect that to DeFi, it unlocks a whole host of options, right? So, uh we launched on Morpho um last month, uh and you're able to finance that HELOC um loan at almost SOFR. So, that's like again, another example of new product that wasn't available because of TradFi rails, and then utility and economics for what you can do with that product in DeFi that you couldn't do in TradFi.

>> When you put up your tokens onto public blockchains, you open it up to new buyers. That's kind of the point. Uh and so, in your, call it, trad business, you had some set of people providing capital to gain access to HELOCs as just an investment, just getting the yield. Uh, but now when you put it on a public permissionless blockchain like Ethereum, there are are potentially new buyers and new capital incoming to access this opportunity that they didn't have before. Who are those buyers? Who is this new uh set of capital that is now interested in the in these investment opportunities?

>> Yeah, so I think if you look at like a lot of the RWA tokens, right? They're They all struggle from Nearly all of them struggle from a liquidity issue, which is you need to wait for some redemption window to open. Um, there's no buyer of last resort, and so you're quite kind of just stuck with it, right? So, because we built a TradFi asset that natively lives on chain, we have TradFi buyers. Every month we do a securitization. So, these are pension funds, insurance companies, asset managers who want to buy those mortgages. They buy them tokenized, um, and they live forever on the blockchain. So, that is sort of that captive demand for liquidity. But in terms of financing those loans before

they get sold, we would use banks, and that's a business that has always just been accessible to the largest banks. It's a great business for them. They get to charge over 300 basis points over SOFR for essentially a no-risk loan. So, what we built is essentially is democratizing access through democratized prime. And so, anyone can now lend against those assets that historically only banks could. Um, and that's really >> primary institution that you guys are cutting out cuz all blockchains are fundamentally about removing middlemen.

Is the primary middlemen that you guys are removing banks? >> 100%. >> I like that. >> 100%. And And look, you know, we believe that a narrow banking thesis is what is going to happen. It's been proved out. We've seen that happen. Um, essentially banks today provide transactional services. Um, you know, now there's actually a competitor to them for warehouse finance, which is everyone in this room. Um, and that's that that's the goal. Now, we also work with banks, right? Um, so they're helpful in structuring and marketing our securitizations, but in terms of, um, in terms of monopolistic access, that's what we're democratizing.

>> So, when you put these HELOC assets on chain in Morpheus, there's 160 billion dollars of stable coins on Ethereum. Suddenly, that market becomes accessible to you guys. And so, that's one half of your answer to the question I'm about to ask. But then there's also potentially net new people who wanted the HELOCs in the first place. Maybe they're not on chain. They never really have touched a chain before, but now there's this HELOC opportunity on this blockchain called Ethereum, and they can just go get stable coins on there, and they can they can also come on chain for the first time. So, there's there's two. There's the pre-existing stable coin economy that you're accessing, and then there's net new people who can now access this by coming on chain for the first time.

Which is larger, and where do you think that goes between the the distribution of capital coming from these two parties? >> Yeah, I think it's a good question. Um, I think, you know, we've had really great success with, um, curators and their willingness to go deep and understand not just, okay, what's the on-screen liquidity, but like let's actually look into the historical loan tape. Let's evaluate the 20 billion of of HELOCs and their performance. Um, and so we've been really successful with that cohort on chain. Um, now, that's probably made up of a combination of individual retail lenders, some larger LPs. Um, so that is a little bit

difficult to dissect, but I think the numbers on chain would demonstrate, I think the token is like 95% um, utilized um, in DeFi markets from DeFi Llama's market. So that's one segment. But it to the other point you asked about which is new capital coming on chain because the opportunity is there. We've been having a lot of conversations with Asian family offices and high net wealth. And access to American consumer credit is nearly impossible for them to access. And so a lot of those conversations have revolved around, "Oh wow. So you're a legitimate credit originator, American company, public company.

You've been operating in the space for eight years now, 23 billion of of assets tokenized. Okay, let's like actually discuss how do I bring some capital on chain to access this opportunity." So I'm optimistic about about both of them. >> I want to learn a little bit more about Figure's business and kind of the margins that are impacted because of this opportunity. So maybe one answer is there's a bigger TAM out there on Ethereum. We would like to access that. Are your guys' margins, your guys' revenue and profit scale with the amount of capital? Maybe that's one answer. But another potential answer is just there's efficiency upgrades. Things are easier for you. Can you maybe talk a little bit about that side of the the equation?

>> Yeah, so you know, we're a platform business. So we're capital light operator. So we're not lending, right? We're marketplaces. So for us volume is is important. Cheaper financing and wider accessibility of eligible collateral is an accelerant to to our business. So the example I gave before was you know, if we were to we use Goldman for our warehouse finance. So the interest rate that we that they charge us there is somewhere around 6 and 1/2, 6.7%.

So if we can finance on Morpheus at today 4.4% which is below SOFR, like that's a meaningful accelerant to our business to attract new originators to come and originate on chain because now we're providing a purely economic product to them that's better. Then we talked about, you know, earlier the the cost of originating HELOC. So, that 23 billion of loans we've originated, that was a product that was not possible to access before. So, that's meaningful. It's not just an improvement around margin for a product. It's a whole new product of prime borrowers in the US that couldn't be served because of legacy institutions.

>> I want to learn a little bit more about the Morpho integration that you guys have. But, why was Morpho the right platform for you? How does it fit your needs? And what are you guys doing with it? >> Yeah, so, you know, we launched sort of an MVP with the Prime token and the Hashnote protocol on Solana in December. And it was a fantastic launch. It grew to a market that was larger than Solana as a borrow asset on Kamino. The challenge though is Solana is a different community and it's not as deep of liquidity. So, 10 times more stable coins on on Ethereum and I think that market struggles with yield more so, especially even at that scale than Solana. So, we we knew we wanted to be

also on an EVM chain. Ethereum made made perfect sense. And I think the Morpho team has been very flexible. They're isolated markets and it sort of was was a no-brainer in terms of scale and composability. >> So, you can make money in Morpho as a vault curator. There it can be a profit center for you guys. Is it a profit center for you or is it more of a distribution engine because that's where people come in and access these the the HELOCs in the first place? >> Yeah, so, I we charge 50 basis points. So, we do make some money. It, you know, we're we're very profitable company in like in the the core tradfi side of the business. DeFi is an accelerant that we

believe what I should say, we believe deeply in native development in DeFi and I think that's evidence throughout our our course, but it's not a profit center for us. Our flywheel accelerates and our profitability grows when we're able to have cheaper and broader access to financing that tradfi is not providing and that accelerates sort of the flywheel for profitability for us. >> What other businesses potentially your competitors are looking over your shoulder at what you guys are doing and learning from you?

>> Learning from me. Um >> Oh, what they're doing is interesting. It's working. >> Yeah, I I think the challenge though is it is working. I don't know if they're learning. Well, okay, maybe I'll put it this way. It's difficult like and you need to have like a a very strong North Star to have that vision of building from nothing and saying I'm just going to have to build the whole ecosystem. Um and so you know, that was my external star. I think what competitors are recognizing is if they can't occupy the full value chain themselves, then they can form partnerships across that value chain and have incremental unlocks in sort of like network of RWA partners.

Um and so you know, you've seen that with with securitize and computer shares, with Uniswap, they sort of build out partnerships for the different functions that they need. Superstate has done you know, similar things there. Um so I think I think that's the way that the industry is is learning to compete a bit a bit more on that is more strategic fullsome partnerships rather than sort of like here's my token >> be a additional assets from Figure that come on chain or you guys primarily focus on scaling the pre-existing assets? Uh what what is next for you

guys when it comes to being on chain? >> Yeah. So, um couple of things. So, HELOC was like again, this weird asset that we picked that had just fantastic product market fit. Uh we we announced a deal um about 2 months ago with a company called GORA, uh who is an AI sort of originator of auto loans in a similar way that we originate HELOCs. So, we partnered with them to plug into our platform to originate, distribute, and finance auto loans. Um we just announced a deal this morning uh with a company called uh Giavi that we acquired uh for residential transition loans.

Uh we have some other deals coming for small and medium-sized business lending, inventory and trade finance. So, it's really a whole host of credit assets across the spectrum in scale natively tokenized. >> Do you think that um what you guys are building and what you guys have built and the success uh that you've seen is unique to you guys or do you see this as scale a scalable model maybe with tinkering for fits and needs of the particular business that you guys are simply first or early to? >> I think the I think the key I think the two key things are an asset originator who truly believes in building for DeFi.

Because there's a ton of great asset originators, there's tons of great cachet brands, but if they are not actually believing either because it moves their margin in a meaningful way or there's a mandate from on high. There's a lot of work that needs to go into purpose-building tokens that work on chain which add value assets. Um so, I I I think that's one element is being committed to it and the second is having a having the utility to unlock economics around it. So, if if can find those originating partners and they can build those partnerships for platform utility, then I think you know, you could you can compete, but I think those are the two things that have served us well in in in our efforts thus far.

>> What can you put some numbers on the current size of the assets that you have on Ethereum and Morpho? And where do you think that will be at the end of the year? >> Sure. So, um you know, right now I think on Morpho I think I think it's about 200 million of TVL. Um on Solana is about 400 million of TVL. Um on just Heloc alone, we do about a billion and a half a month of new new Helocs. So, we have quite a bit of capacity on just that one product. Um and I named a you know, a host of other a host of others.

Um so, I would say, you know, we would be excited and we think it's reasonable for that number to be in the billions. Um certainly before the end of the year. >> The billions on Ethereum and Morpho by the end of the year. >> Yeah. >> I'll hold you to it. >> Well, let's check back in. >> Reed, thank you so much for joining me on the show. >> Awesome. Cheers. >> [applause]