Today, financial innovation is slow, costly and reserved for the few. Often it happens manually in spreadsheets and is available only for the largest of investors. Open source blockchains and digital native assets are changing this, just like AWS and open source did for software development.
Ethereum is the AWS of finance, radically transforming the cost to build and release financial products.
It used to be expensive to buy the servers and software licenses required to release software. Companies raised millions and spent much of it on Oracle licenses and server racks. Two things happened. Open source systems (bye-bye Oracle database) replaced many expensive software licenses, and AWS offered a pay-as-you-go system to replace high upfront costs. As a result, the cost to build and release a software product dropped 10x and massive experimentation blossomed.
This same thing is happening in finance today. Open source systems on Ethereum are replacing the expensive and manual systems (DTCC, clearing, trustee) reducing the cost and time to bring financial products to market. We’re on the cusp of an explosion of more efficient and open financial products.
The Layers of Finance
While investors usually only pay attention to the top of the stack, what products they can access, much of the important work happens under the surface. To appreciate why we’re on the cusp of change, it’s important to understand what’s going on under the covers.
In traditional finance, layer upon layer of administrative (and very often manual) work falls to interlocking players who have not modernized significantly in decades. This creates a baseline of inefficiency and cost that restricts innovation.
Ever wonder why the minimum or cost for a financial product is so high? The reason usually lies in fixed costs or restrictions that come from an intermediary lower in the stack. Tokenized Finance upends this by replacing much of those intermediaries and fees with trustless code, it’s digital at the core. That’s critical because it’s the first step into turning finance into an API, making programmable money a possibility.
A Simple Example
Let’s take securities-based lending as an example. It’s a simple financial product, cash loans using securities as collateral, and growing quickly.
In traditional finance, brokerages and banks offer customers competitive rates with minimums ranging from $50,000 to $250,000 to access a cash loan. That’s not bad and gives investors an opportunity to take a non-purpose loan while still retaining their investment positions.
In Tokenized Finance, the financial product itself is code, protocols built on Ethereum A great example is MakerDao’s CDP which allows investors to deposit their collateral and take a cash-like (DAI) loan. It’s simple and the rates are not too different than what is available in traditional finance.
The big difference is the lack of a minimum. Code just works. It works exactly the same if the amount being deposited is worth $1 or $1M. And because there are no fixed marginal costs from intermediaries, the financial product as code can deliver the same value to the smallest and largest of investors.
Now, this may not seem like a big deal right now. Do you really want to take a $1 loan? Probably not. It does however provide a glimpse into what a future of code-driven financial products can offer.
What’s the Future?
Let’s add up what we know about Tokenized Finance.
- Transforms the core of finance into API, similar to how AWS turned software infrastructure into an API.
- Removes the fixed costs and antiquated rules of the financial intermediaries, removing barriers to bringing financial products to market and the costs inherent to them.
This means that software teams can now build and release financial products quickly. In addition, without fixed costs to every transaction, they can experiment with business models not before possible.
What’s more interesting is what will happen as the ecosystem grows.
Permissionless innovation with a reduced cost to bring products to market means rapid experimentation is now possible. This will create financial products not possible or conceived of in traditional finance.
The future is bright.