Ethereum will devour the settlement layer of Wall Street

Foreword: Besides DeFi, what else can Ethereum be used for? Traditional financial institutions can only use Ethereum for asset securitization, which can bring about huge changes. Because compared to traditional solutions, Ethereum is a more reliable settlement layer. According to author Josh Johnson, Ethereum will eventually devour the settlement layer on Wall Street. This is not the case. Perhaps we can see the preliminary results in a few years. This article is translated by "SIEN" of Blue Fox Notes.

A few weeks ago, I spoke with Fidelity ’s agent. Somehow, when transferring funds and making transactions between my financial institutions, I accidentally placed more orders than the actual money in my account. A few days before I spoke with the agent representative, I received a letter saying that if I failed to transfer enough funds before this weekend, they would liquidate the full amount of capital to make up for the gap.

I asked the person at the other end of the phone: "How is this possible? When I don't have the money, why am I allowed to trade?"

She didn't say any good answers. Basically, she said, Fidelity can allow people to make transactions when they do n’t have the money, as long as they believe the payment is completed at the time of settlement. Somehow, I discovered this loophole by accident and also found that it is not so rare, which reminds me that I do not really own the assets in my brokerage business.

Problems of traditional finance and settlement

The problem of tracking asset ownership is a problem, not just brokerage. The cap table is usually tracked in a spreadsheet and may be mistyped. Re-mortgage and short selling will result in more shares than actually exist. Well, here is the story of Dole Foods, where shareholders ultimately own 33% more than expected. This is a challenge because there is no global representation of ownership status at any point in time.

However, if you have been working in the field of encryption for some time, then you may have heard that some companies are trying to solve this problem with blockchain: t-Zero, Securitize, etc. However, I bet you may not have heard of a company (Cadence) using Ethereum's mainnet to solve this problem, which is in the niche financial field of securitized commercial lending.

Looking for high-yield in a low-yield world

Before delving into its solutions, I would like to briefly introduce how I found Cadence and what their business provided me as an investor.

Obviously, we have spent at least ten years in a low interest rate environment, and the past few weeks have shown that such time will continue indefinitely. Therefore, where should investors go to get income? How do some retirees, such as my parents, earn a good cash flow on the life-cycle value of savings?

Gone are the days of earning 5% in bonds and other low-risk loans. P2P lending, once regarded as a way for small investors to enter bank lending proceeds, is now being squeezed out by institutions that were supposed to replace them. As interest rates fell, investors began to have to seek returns in high-risk assets: high-yield dividend stocks, low-grade bonds, and real estate. When the currency becomes cheap and the world is full of dollars, where will you invest?

One of the things I decided to focus on was small business financing. For those small businesses that need short-term cash flow to pay suppliers for goods or wages, they are willing to pay a higher loan interest rate. These small businesses usually mortgage their accounts receivable or other assets to obtain short-term financing. For investors seeking to diversify their passive income, it provides a fairly good risk return. I think that since its earnings have little correlation with stocks and other high-yield investments, these investments can be used as part of my venture portfolio.

There are many companies that allow qualified investors to invest in these assets, but they often require large amounts of capital or are unable to obtain a transparent understanding of the flow of their assets. Then, I stumbled upon Cadence. They can make it simple to invest only $ 500. They integrate Bloomberg Ultimate, their website is intuitive, and provides competitive returns. Then, I learned that they are using the Ethereum mainnet in the background. Deal! I had to try it.

I have invested in Cadence for more than 6 months, and I am surprised by the investment performance and its ease of use. I have invested in 11 transactions and the annualized return rate is usually between 9% -12%. The return is in line with expectations, and as the old transaction expires, I can enter a new round of transactions. The duration of each transaction is from 1 month to 1 year, but usually 3-6 months. They are provided by various loan originators with specific industry focus, including transportation, SMEs, small Mexican businesses, and even encrypted loans.

WeChat picture_20200405120924 Figure 1. Example of investment

WeChat picture_20200405120927 Figure 2. Example loan provision structure

The gradual replacement of the underlying architecture

When I talked to its founder, Nelson Chu, I asked him: "Why put these transactions on Ethereum?" He said they use Ethereum so that everyone's wallets can "fully reflect their trading activities" , It can become a perfect audit trail. "

think about it! Perfect audit trail! The crypto community has been talking about this idea for many years. And now, we see this dream come true. It is on the Ethereum mainnet. Each investor gets the Ethereum address of their ERC-20 token, which represents the allocation of their specific investment. They can go to Etherscan and view these tokens. The terms of the transaction point to a specific contract on Ethereum, which represents all owners (fake names) and their distribution.

WeChat picture_20200405121022

Now, don't get too excited. This is not DeFi as we know it. This is not without trust. It still has an intermediary Cadence. If they enter the wrong contract allocation, they can issue a new contract.

These mainnet contracts are more of a parallel structure, which can track the global status of their ownership at any point in time. No one has to track how many shares are allocated (see what I did there?). No one updated the spreadsheet. Ethereum provides automation for their backend.

But Nelson has long-term strategic plans. When it comes to larger transactions (such as the just completed Fat Brands entire commercial securitization transaction), institutions expect these securities to be tradable.

He put it this way: "So, in fact, we have a way to asset securitization that people want to trade vs. others just tokenize things that people are not interested in liquidity. Therefore, when the trustee needs to allocate When banks want to conduct secondary market transactions, tokens will play a bigger role in understanding who owns them and when.

This may mean that investors will be able to trade ERC-20 tokens representing their loan contracts (cash flow) on the mainnet.

Mainnet as a strategic advantage

Securities are now on Ethereum. Few people are talking about it. But this is Cadence's strategic advantage. They can reduce these transaction costs, provide auditability, and automate the back end through Ethereum.

Not all businesses need to be DeFi businesses. Not all business starts without trust. However, gradually, people will see that having a transparent and open global ledger will give them a strategic advantage over competitors. As Chu said:

"This is a long game. The trustees are satisfied that we even started to issue digital securities! As long as we can prove that we can make their lives easier and get more profits, the more likely it is to adopt high."

I believe that this is how we are going to see how traditional financial infrastructure migrates to Ethereum. It will be in a pocket, these pockets are seamlessly connected and work together. Build and enhance liquidity with each other, making interaction, auditing, trading and investing easier!


Risk warning: All articles in Blue Fox Notes can not be used as investment advice or recommendation. Investment is risky. Investment should consider personal risk tolerance. It is recommended to conduct an in-depth investigation of the project and carefully make your own investment decisions.

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