Hey fintech friends, 

Critics have long dismissed crypto technology as a solution in search of a problem, but those critics haven't heard about Figure.

Launched in 2018, Figure saw early on how blockchain could unlock marketplaces in areas of financial services that historically operated in silos – creating price discovery, speeding up transactions, and enabling new participants to enter legacy markets.

In the credit world, marketplaces commonly connect borrowers and lenders to originate loans– giving consumers the ability to shop for mortgages, auto loans, or credit cards. But to this day, there's been very little change in how lenders source capital to actually fund those loans.

The market for funding loans still operates in silos. 

Figure is taking a different approach. Since its launch, Figure has become the #1 non-bank HELOC (Home Equity Line of Credit) lender in the world by automating lending processes– passing on average ~125bps in cost savings to borrowers.

How did this fintech create ~125bps in cost savings in a centuries-old industry?

Figure went to market with a HELOC platform offering homeowners an intuitive, streamlined borrowing experience. From there, they built a marketplace to streamline Figure’s own access to capital from institutional partners, and in 2021, began leveraging blockchain to further scale this liquidity by settling HELOCs on the Provenance Blockchain.

Settling loans on Provenance allowed Figure to cut out middle men, drastically reduce fees, and collapse months-long funding cycles down to days. To date, Figure has tokenized $15.3 billion in assets and settles over $600 million in loans on Provenance monthly.

Now, Figure is opening tokenized HELOC assets to investors on Democratized Prime, a borrow/lend marketplace that allows institutional and retail users alike to fund these loans and earn yield on the order of a ~9% APY*.

Let's dive into how Figure's Democratized Prime pool works, how on-chain marketplaces drive efficiencies for borrowers and investors, and what other lenders should take away from this launch.

Upending the loan funding model

If you’re starting a lending business, you’ll need to source cash to fund loans. You'll likely source these funds in one of two ways: 

1. Warehouse lending: A warehouse lender fronts the money to borrowers on behalf of you (the originator) each time you originate a loan. The funds you drew down from the warehouse line will accrue interest until you repay them to the warehouse lender, so you'll need to find an investor who agrees to buy the asset off your books. When you've sold the asset to the investor (usually, weeks later) you'll use the proceeds to replenish your warehouse line, plus interest on each day of “dwell time” that your credit draw was outstanding.
2. Forward flow agreements: You find a forward flow provider who agrees to purchase any loans you originate at a set spread, as long as the loans fit their origination criteria. This set-up reduces your dwell time, but given each provider has different origination criteria, you'll need to negotiate bespoke agreements and adapt your credit programs for each partner. And if interest rates shift, you'll need to eat the losses out of your lending margins or pause originations while you renegotiate terms with each forward flow partner.

Regardless of how you choose to fund loans, you'll pay fees in every step of the process (legal fees to customize contracts for each capital partner, interest on warehouse draw-downs/forward flow advances, operational costs for underwriting and originations, fees to securitize loans and settle the transfer of assets...).

In total, these fees amount to several percentage points of each loan– costs that will inevitably get passed down the line to borrowers.

Enter Democratized Prime.

By creating a marketplace for loan assets to trade on-chain, Democratized Prime effectively offers lenders a real-time warehouse line that's funded by a deep pool of investor liquidity, priced hourly by the market, and collateralized against lenders' tokenized HELOC assets.

Notably, Democratized Prime unlocks access for retail investors to access yield-bearing home equity loan instruments– with the flexibility for investors bid on the interest they’re willing to offer in an hourly Dutch Auction and earn 3.82% APY on YLDS* (Figure Markets’ SEC-registered yield-bearing stablecoin) until their bids are accepted. 

How Democratized Prime works

On-chain borrow/lend pools upend the economics for lenders, their borrowers, and investors.

Given the impact this model stands to have on traditional lending models, it’s worth diving into how Figure’s Democratized Prime platform is pioneering this model for HELOCs.

Democratized Prime lives in the Figure Markets app and functions like a real-time warehouse line priced by the market.

Here's what this looks like, step-by-step: 

1. Origination: Figure underwrites and issues Home Equity Lines of Credit to borrowers. HELOCs are tokenized on the Provenance blockchain and used as collateral for loans to new borrowers.
2. Hourly Dutch auction: Investors acquire YLDS, an SEC-registered yield-bearing stablecoin. Investors bid the amount of YLDS they'd like to lend and the rates at which they're looking to lend them in an hourly Dutch auction. Bids clear at the highest rate, so if a higher rate clears in the auction, other bidding investors also receive that rate. Investors receive 3.84% APY* (at the time of this writing, SOFR-50bps) on YLDS waiting to get into the pool; if there are no resting bids, yield rates spike to 30% to move liquidity into the system.

3. Monitoring: Once bids are accepted, the underlying loans' cash flows and performance updates are reflected on‑chain. Lenders pay interest while funds are outstanding and can top‑up or reduce collateral as the pool changes.
4. Redeploying capital: Figure uses the proceeds to originate more HELOCs, restarting the flywheel.

Why put loan assets on-chain?

Figure is no stranger to driving efficiencies through blockchain, having tokenized assets to drive transparency and speed virtually since its debut.

Tokenization unlocks a number of efficiencies for all players in the lending ecosystem, notably:

• For lenders, having transparent and uniform marketplace for liquidity opens access to funding for new loans in days, drastically reducing fees, time spent negotiating with capital partners, and constraints on new borrower originations.
• For borrowers, this translates to more attractive terms for HELOCs, potentially at significant discounts than to those of big bank lenders.
• For investors, tokenization opens access to historically closed-ended investments with yields that have historically outpaced* those of US Treasuries, high-yield savings accounts, or corporate bond ETFs.
  • For example, investors in a HELOC-backed asset on Democratized Prime that's generating ~9.5% APR from borrowers could earn ~9% APY*, with complete visibility on the real-time performance of investments and collateral via Provenance. Hourly Dutch auctions also gives investors on Democratized Prime the ability to set their own rates and liquidate their positions as bids get matched.

To illustrate these efficiencies, let’s break down how a hypothetical lender might save ~125bps* on a (purely hypothetical) $150,000 HELOC by sourcing funding from a decentralized borrow/lend pool (like Democratized Prime) versus a traditional warehouse + take-out flow.

In this scenario (again, for illustrative purposes only), a HELOC lender sourcing liquidity from a decentralized marketplaces eliminates many of the friction points in a typical warehouse flow and reduces time to liquidity from several weeks/months to a matter of days:

Illustrative economic breakdown: Warehouse line vs. Decentralized marketplace

Looking forward: Takeaways for lenders & investors

Figure is demonstrating how on-chain marketplaces can bring new efficiencies, transparency, and liquidity to lending models that have grappled with legacy frictions for decades. A few key points to take away here:

Decentralized marketplaces are disrupting the legacy loan funding model

Tokenization unlocks a single source of truth for richer data on asset performance and pricing, creating new access to liquidity for lenders, opening yield-bearing investment opportunities for retail users, and unlocking lower rates for borrowers. 

DeFi allows new categories of investors to participate in lender liquidity

Through Democratized Prime, access to yield instruments that were once only available to institutions and banks is now being brought to everyday retail users, backed by real-world on-chain assets.

All this at a time when private credit is playing an ever-bigger role in debt capital markets, and as the US regulatory landscape is moving towards allowing retail investors to participate in alternatives through their retirement accounts (potentially opening the door for additional alternative investment opportunities in the near future). In the mortgage market, rumblings of the government taking GSEs like Fannie Mae and Freddie Mac public would push credit spreads to widen further which– if enacted– would potentially increase lenders' need for new sources of liquidity.

New asset types could be going on-chain

Figure’s Democratized Prime pool is pioneering loan funding for HELOCs, but this is the beginning of a new funding model for other forms of credit. The decentralized infrastructure is primed to also support liquidity for mortgages, personal loans, or small business lending…this is a space to keep watching 👀

*Disclaimer: This article is for informational purposes only and is not investment advice. Program details, yields, and eligibility are governed by official documentation and may change.

The rates referenced are not guaranteed and subject to change as new offers are placed. Democratized Prime uses a Dutch auction method for its borrowers/lenders. There is an inherent risk due to interest rate volatility in a Dutch auction interest rates in the auction may rise rapidly. At the time of acceptance, your loan may be filled with a different or higher interest rate than offered at the time of selection.  The interest rate is only fixed at the time of loan approval and not at the time of loan acceptance.

Participation in Democratized Prime loan pools is exclusively conducted using YLDS. YLDS must be purchased prior to participating in the lending pool. No other tokens or currencies (including USD or USDC) can be used for lending in this pool.

YLDS Stablecoins are unsecured face-amount certificates and solely backed by the assets of Figure Certificate Company (FCC), who is the issuer of the certificates. As a subsidiary of Figure Markets Holdings, Inc., FCC is (absent exclusion or exemption) required to comply with certain limits on its activity, including investment and/or trading limitations on its portfolio and other limitations under applicable banking and securities laws. FCC is not a bank, and the securities it offers are not deposits or obligations of, or backed or guaranteed or endorsed by, any bank or financial institution, nor are they insured by the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board or any other agency. The Certificates are not an insurance company product, an equity investment, or an investment in a money market mutual fund. FCC's qualified assets on deposit may exceed the deposit amounts required by applicable regulations. If there are losses on FCC's assets, FCC may not have sufficient resources to meet its obligations, including making interest and/or principal payments on your certificates. Most of FCC's assets are debt securities and are subject to risks including credit risk, interest rate risk and prepayment and extension risk. You could lose money by investing in the Stablecoin. Although the Stablecoins seeks to preserve the value of your investment at $0.01 per share, it cannot guarantee it will do so. You should consider the investment objectives, risks, charges and expenses of certificates carefully before investing. Download a free prospectus, which contains this and other important information about our certificates Figure Certificate Company Prospectus available here. More information about YLDS and FCC can be found here.

Interest rate applicable to all Certificates is the overnight Secured Overnight Financing Rate (“SOFR”) less 50 basis points, with a minimum rate of 0.00%. SOFR stands for the Secured Overnight Financing Rate (SOFR), which is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. For more information, please visit the Federal Reserve Bank of New York's Website by clicking here.

Figure Payments Corporation offers self-directed investors and traders cryptocurrency services. It is neither licensed with the SEC or the CFTC nor is it a Member of NFA. Figure Payments Corporation's NMLS ID number is 2033432, and is located at 100 West Liberty Street, Suite 600, Reno, NV., 89501. You can verify Figure Payments licensing status at the NMLS Consumer Access website. Click here for Figure Crypto's state license and regulatory disclosures.

Figure Lending LLC dba Figure. Equal Opportunity Lender. 

NMLS 1717824. Terms and conditions apply. Visit figure.com for more information.