The Credit Layer for DeFi

Transcript

[music] >> Hello. How are you guys? My name is Reed Simon. I'm the president of digital assets at Figure. Before I start off, quick show of hands, does anyone know who Figure is? All right. All right. So good. Well, we're talking about the credit layer for DeFi. >> [snorts] >> Um, and Figure's a a public company in in the US. We listed in September.

It was founded in 2018 and we're mostly known for our HELOC origination business. >> [snorts] >> The business is, I would say, pretty evenly split between TradFi capital markets, loan origination, and crypto. So we have an exchange and we have sort of built all of the core layers of the TradFi securitization system, but on chain. So [snorts] we're going to talk through sort of what our ambitions are and how we're changing things on chain, we think, for the better for for credit. But I guess we'll go ahead and start off here, which [snorts] is and it should be closer to 300 300 trillion. But the point of this is this is the largest asset class in in the world. And so the the

problem is, well, why hasn't DeFi been more successful in bringing that to chain? We would say it's not because of the risk or sort of it being hard, but fundamentally it's it's the access. If you think about mortgage products, they've been out for decades, right? People underwrite them, they know how to re-underwrite them, they trade them, there's a securitization flow. But ultimately, there's about 500 billion of equity that is trapped inside of bank balance sheets or other kind of TradFi institutional rails. And so our business is ultimately bringing that to to DeFi.

And so if you, you know, you think about sort of the the current approaches to how our industry has tried to solve this, we would say they're probably both not the the right ultimate solution. They're good first steps. And that was kind of sort of Biddle's entrance there. And we would say that that looks like more of a token wrapper approach. So taking fundamentally TradFi products, not adapting them at all, and sticking them into a token and then putting them on chain. And I think a lot of the sales effort behind that was really driven by, "Hey, this is my brand name. You can trust me in TradFi, and so automatically you ought to want to buy it on chain." The problem with that is most of the time it doesn't really work, right? And they're not purposely built

both from a token structure perspective, but they're also still fundamentally on TradFi rails. So I'm sure we're all familiar with sort of the the limitations. It's a good first step, but it's not ultimately where we need to go. The second path would be kind of credit intermediation. So this is you I or I borrow from you and then I lend to someone else. And we think that is not ultimately It works when it when it works well, it looks like yield. When it doesn't work well, there's asset loss.

And so for us, you know, we think that there's a third approach that isn't really talked about a lot. And it's what we've based our business on since since 2018. We've originated 22 billion of real mortgages with real homeowners, and they're all natively tokenized. Our credit approval system is all automated. Instead of humans sort of reading through or even looking at computer files, we pull data directly from the source. So if it's an Experian credit score, that API is writing directly into the blockchain. If it's an automated If it's a property valuation, that property valuation API is writing directly in.

There's no human interface in our approval methods. And so, you know, if if we kind of set up that stage again where the problem is, why isn't there more credit on chain, we've discussed kind of the two prevailing approaches and why we think there's a better opportunity and we think now really is the time. And we're seeing some of this happen in the real world, right? We're seeing private credit crack or whatnot. People who thought that lending or, sorry, investing in a private credit fund, "Oh, but there is liquidity." And it turns out there's only liquidity when or, sorry, there's only liquidity when no one wants it. And so gates are up, marks are maybe down, depends on what the manager says.

But ultimately, we think there's a better way to to do this. And we think now is really the time. I think if you look on chain, you've got something like 10 billion dollars of stablecoins on Aave that's earning less than risk-free rates. That's not a good thing. But I think it's symptomatic of kind of the bigger role that debt has played on chain in TradFi. You sort of have two different reasons for, rather, two different asset classes for or reasons that you would issue debt versus equity. You know, you don't want to give away the upside, so you borrow. And that borrowing will be at some interest rate that's commensurate with the risk. On chain, that doesn't exist.

You just issue a utility token and now you've got capital to build your project. So there's sort of this perverse dynamic where is risk really being adjusted accordingly to true or, sorry, is yield really being adjusted accordingly to the underlying risk? And kind of the prevailing reality that yields on chain are largely driven by just supply and demand for leverage. So the idea of productive debt is very hard to find on chain because there's not really use cases would be would be my argument.

So we've we've taken a different approach. And so, you know, if you think about Figure, we are a completely vertically integrated player in this space for RWA. We own the origination, we set the credit box, there are assets, we have the trading infrastructure, tokenization, and licensing. And interestingly enough, we have the TradFi elements of warehousing capacity at money center banks. And most importantly is a securitization shelf. And that allows loans that will get originated with, say, a 25-year duration or maturity to have a five-year duration in reality for paydowns, but ultimately is financed in a warehouse for a much shorter period

of time. And so like a lot of other RWAs that may not have liquidity, we do a securitization of about 600-700 million every 42 days. So if you think about that, you have this long duration asset that's able to get financed on an hourly basis and is ultimately off everyone's balance sheet, call it every month and a half. And then, you know, so that sort of is like the the layer that we've built out. And that's for TradFi, right? But we've also built out sort of the distribution rails for DeFi as well. So that looks like a web two interface for our institutional clients who come and say, "You know what? I want to lend against

these HELOCs, but I want MPC technology, I want to log in, I don't really want to bring my own wallet." And we have that. But we also work with partners. So Hasha is sort of our distribution protocol that connects our core properties on Provenance to mainnet and soon Ethereum. And Hasha takes those cash flows that that we Figure are structuring and distributes them permissionlessly through yield-bearing token. It's grown to 600 million-dollar market on Camino, which we launched in three months.

So we sort of use that as a proof of concept on Solana and then are excited to announce that we're bringing it to mainnet. And I think these are these are some of the kind of core benefits of Prime. It's an uncorrelated yield, it's a real asset with a real American homeowner who has monthly payments that they're making. And that's ultimately what drives yield. A lot of our homeowners use these loans for renovating their house or making big purchases. They're Prime borrowers, some are ultra-prime borrowers, 754 average credit score, about 40% debt to income. So really high-quality real-world assets that are

natively tokenized and generating yield in a permissionless way across the ecosystem. And, you know, we made this announcement about Figure Forward a couple weeks ago. And it's not really a product, but if you think about what we do that's unique, there's a couple things. One is on sort of the asset origination side for choosing good borrowers and building a turnkey solution for 250 partners to plug into our origination system and originate non-fungible but very very similar loans. And that is what is fed into our securitization vehicles getting AAA ratings. So again, these are really high-quality assets. But what

we're able to do, and this is I think one of the bigger problems that's facing RWAs coming on chain, is how do you liquidate $5,000 of a single loan, right? And this is what we're seeing with private credit as well right now. Is if I want to withdraw 50,000 dollars from I don't name your favorite asset manager. There probably isn't an exactly $50,000 loan and a very easy buyer that's just waiting to buy it, right? And that's the challenge is how do you liquidate a portion of a non-fungible, much larger loan?

And we think we've figured out a solution and we call it Forge. So you can sort of think of Forge as an abstraction layer. So, non-fungible similar loans end up flowing in. So, if you're an originator, you would sell them to the forge, and the forge breaks them down into that pool of loans, will break them down into loan participations that are each valued at a dollar. And what then happens is you can take those loan participations, and they're real title to cat or real claims on cash flows from the underlying loans. And because we sit in this interesting position between institutional buyers on the securitization vehicles and DeFi pools, we're able to operate liquidity

pools with LP tokens in them and stable coins. And so, when there's an arbitrage opportunity where and the loans are a different price either because they're below market or above market, we're able to step in and either buy them cheap and sell them into the securitization vehicle or the inverse, originators can come in and sell them when they're above above market. And so, that really solves kind of this liquidity issue. We solve the collateral issue with the fact that these can be permissionless assets that flow around because they're loan participations. And we've also solved the liquidity piece. So, we think, you know, this is what has driven the success for Prime.

And Agora is a a a consumer auto loan provider in the US that we announced a partnership with, and we'll be rolling them out through forge as a third-party originator through our systems. And we're excited to be able to deliver this both again to institutional users where we sit in the middle and are able to structure cash flows, reduce risk in the way that those cash flows ultimately flow to lenders.

And this will be sort of the the model with which we'll we will move into other asset classes. So, this is auto. We've got SMB loans in the wings and invoice and um invoice and or sorry, inventory and trade finance coming as well. And the nice thing again is these are complementary to the way that tradfi operates today. And the liquidity is ultimately driven by securitization vehicles. So, it's not assets that are sort of where they're not the shittier assets that are just sitting there because tradfi doesn't want to buy them. It's actually disintermediating banks in how they finance these assets before they go into securitization vehicles.

And again, I think, you know, we launched on on Solana as sort of like a way for an MVP to figure out like does this broadly have market fit? And we've had fantastic success. And I think one important thing to call out is, you know, those results of 600 million in the the Camino market and five of the largest curators on Solana all approving and deploying into it is really a testament of the quality of those, but the the volume and and the TVL, there was also no incentives. So, this was not some, you know, temporary token emission scheme that, you know, people come in and as soon as the token emissions have run away, all your money leaves. This is this is really an organic this is an organic

>> [clears throat] >> yield that's supplied by real borrowers with real stake in the outcome of their loan. We've had great success on Solana, and we're excited to bring it to to Ethereum. But I think um you know, I think zooming out and looking bigger picture, you know, we want to view ourselves as not one product or sort of one abstraction layer. We want to see ourselves as as really the credit layer for the industry. So, delivering the largest asset class to the chain that you guys are all building on.

And we think that we've got a better mouse trap for asset finance with real borrowers, real cash flows, and real liquidity. Happy to take Yeah, happy to take some questions. obvious The obvious question here is is this really DeFi? Are you are you connecting to a website? Or is this a KYC process and really you're just another bond salesman? So, there's two ways to interact with it.

We believe very much in serving users where they are and how they want to be served, right? So, for institutions that want a KYC process and they want a web two experience and are less concerned with some of the composable elements of DeFi, you can get that through through our Providence instance. And then Hashflow is a permissionless protocol. So, those smart contracts are available to anyone and all of the availability for composability. So, we very much believe in serving the whole universe with the whole universe of customers or potential users.

In terms of the like the original the initial origination and the credit analysis like the like the credit analysis goes into it. Is that are you effectively relying on the effectively the funds that are that are kind of, you know, doing this origination in their, you know, them doing the right, you know, credit analysis and basically just taking a a slice of their of their diversified portfolio or are they allocating kind of oh yeah, you guys can have this loan or you guys can have that loan and we'll keep these loans. Is this is there any adverse selection going on there at all?

No. So, if you think about, you know, when I say we've built a a turnkey sort of white label solution, we have one credit box for for HELOC. So, one singular one. We work with our origination partners about 250 mil 250 of them, and they span small mortgage originators, Lowe's Home Improvement, Credit Karma. They're brands or or companies that would otherwise not want to run a HELOC origination business either because of their balance sheet or they don't have access to a securitization vehicle. So, it doesn't matter who is the originator, that customer of theirs is going through the same credit approval process in terms of ultimately receiving an

approval. And that flows through and is validated by the fact that our securitizations do so fantastically well. Is it doesn't matter who the originator is because there's no decisional authority on a human on a human basis. It's all run through the same origination and approval system. Two questions regarding you just doing business in US. You you haven't done business in in Europe yet or No, I think you know, our our founder was a founder of SoFi and really perfected sort of the direct-to-consumer lending business. We're just much more

familiar with sort of credit laws and and sort of all of the associated creditor protections that exist in the US that we don't currently have plans to expand outside the US for for for mortgage or or auto. Um more more mortgage because in Europe I think we have different regulations and different rules how to proceed with that kind of products. I So, I wouldn't be able to speak what I I know what I don't know, and I don't know about European mortgage laws. So, is there a special regulation for mortgage loan in in US or In in terms of like

the the security, I think the the reason ultimately that our founders are American. They understand the the housing market in in the US. I'm not really in a position to compare why we would do American mortgages and not European. I would presume it's a function of it's not an area of expertise of ours. Okay. Thank you. Okay. So, thanks for the presentation. Awesome. I appreciate I appreciate the time. You can go to to figuremarkets.com.

And the most important thing I forgot to announce. So, when we are launching on mainnet, we'll be partnering with Morpheus and Centaur for curation. And we're super excited to bring our assets to DeFi's home and hopefully improve the yield economy for everyone on mainnet. >> [music]