Tech
Crypto Exchange Figure Markets has a plan to democratize finance
At first glance, Figure Markets, the cryptocurrency exchange recently unveiled by serial entrepreneur Mike Cagney, looks like another post-FTX trading and custody play aimed at institutions. But dig deeper and a spectrum of value propositions emerge, from the practicalities of cost savings to the visionary revolution.
Key components include: an alternative trading system (ATS), a broker-dealer license, the ability to cross-collateralize between cryptocurrencies and real-world assets, and lending and borrowing using Figure Technologies’ balance sheet as a catalyst to keep the money flowing. things. All this is supported by multi-party calculation (MPC), a largely decentralized order book and the support of market maker Jump Trading.
It’s certainly true that the billions of dollars in assets abandoned on FTX have prompted a rethink of cryptocurrency exchanges. For Figure Markets, the need to build an exchange evolved from a sister company Figure technologies‘ history of tokenizing non-crypto assets (over $30 billion since 2018) using the Cosmos-based Provenance Blockchain created by the company.
By Cagney’s own admission, experimental efforts such as creating an on-chain market for shares of private companies and trading Figure shares on the ATS have failed to gain traction. Likewise, onboarding large giants like Apollo to trade fund interests on-chain also hasn’t worked.
Cagney remains enthusiastic about this learning curve. “These are two very popular business models that people are proposing right now for blockchain. We’ve done both and I can tell you that neither works,” he said in an interview with CoinDesk. “So, we decided to take a step back and analyze the structure of the market. What emerged was that Binance and Coinbase work the same way as FTX, even after what happened there.
The right direction was to use MPC, based on Jump Crypto Silo offer, which represents a perfected interest in terms of safety it is analogous to self-custody and effectively conveys Cagney’s concept of a “decentralized exchange.”
Cagney’s version differs from a DEX in the sense of decentralized finance (DeFi), where anonymous parties trade using a automated market maker (AMM). Instead, it presents a limit order book, but as close as possible to the on-chain because it is technologically possible to implement it on a large scale.
“We can’t scale it to a level where we can be competitive with Binance and Coinbase,” he said. “So you end up having to take an order matching construct off the chain, where you write back to the chain every five seconds. For five seconds you are using a centralized construct of orders, but you are not yet taking ownership of the collateral, which is important.
In any case, Cagney’s view is that AMMs are not good for consumers. “Everyone beats their chest about AMMs, but the reality is that AMMs are constantly being exploited by market makers who attack retail clients who trade on them. The real panacea is when we get proper blockchain computation. But until then, we need to do off-chain episodic matching to satisfy just the throughput we need. This is not false to the decentralization thesis, or at least is in line with it.”
Market makers like Jump saw enormous value, both in the decentralization of Figure Markets and in the possibilities of cross-collateralization. But they flagged another issue, the issue of liquidity for lending/lending and the ability to access capital from a lending/lending perspective, Cagney said. “Look at the major cryptocurrency brokers: there is really only so many hundreds of millions of dollars of capital available to lend in an industry that could easily consume billions of dollars of capital per day.”
To address this, Cagney has set aside approximately $100 million from Figure’s balance sheet to spin the lending flywheel.
“What’s really interesting is how you can democratize primary finance, so you don’t need an introductory broker,” Cagney said. “Just connect your wallet to the exchange and trade. I don’t need Robinhood, I don’t need Schwab, I don’t need TD [Ameritrade]and the entire prime system. What you ultimately end up with is a total reshaping of the way financial markets work in a way that is hugely disruptive but hugely creative for everyone in the ecosystem.”