AWS for Finance

Ethereum is poised to become the enabler of a new way of fully digital finance. Just like AWS did for software backends.

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.

Everybody benefits from the great software created as a result. Want an app to help meditate? Maybe find the cheapest gas station? No problem, software has you covered.

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.

  1. Transforms the core of finance into API, similar to how AWS turned software infrastructure into an API.
  2. 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.

Today, that’s resulted in Tokenized Finance products that mimic traditional products with lower minimums and costs. MakerDAO for securities-based loans, Compound for money market just to name a few.

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.

Wyre Podcast

Chat with team at Wyre about what a brokerage will look like in the future.

Thanks to the team at Wyre for having our me on their podcast last week. We had a great time covering a range of  topics from the state of wallet software, regulation to the future of Fetch and financial services.

You can listen to the podcast  and there is also a transcript of the conversation on the Wyre Blog.