Ethereum Will Eat Wall Street's Settlement Layer

Editor's Note: This article comes fromBlue Fox Notes (ID: lanhubiji), reprinted by Odaily with authorization.

Editor's Note: This article comes from

Blue Fox Notes (ID: lanhubiji)

Blue Fox Notes (ID: lanhubiji)

Preface: Besides DeFi, what else can Ethereum be used for? Traditional financial institutions can bring huge changes just by using Ethereum for asset securitization. Because Ethereum is a more reliable settlement layer than traditional solutions. According to author Josh Johnson, Ethereum will eventually swallow Wall Street's settlement layer. Is it so, maybe within a few years, we can see the initial results. This article was translated by "SIEN" of Blue Fox Notes.

A few weeks ago, I was on the phone with my broker at Fidelity. Somehow, while transferring funds and doing trades between my financial institutions, I accidentally placed an order for more money than I actually had in my account. A few days before I spoke with the broker rep, I got a letter saying that if I didn't transfer enough funds by the end of the week, they would liquidate the full amount of capital to make up the shortfall.

She didn't come up with any good answers either. Basically, she said, Fidelity could allow people to make transactions when they don't have the money, as long as they trust the payment to be made at settlement time. Somehow, I stumbled across this bug, and also realized that it wasn't that rare, and it reminded me that I don't really own the assets in my brokerage.

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Problems with Traditional Finance and Settlement

The problem of tracking asset ownership is a difficult problem, not just for brokerages. Cap tables are often tracked in spreadsheets and can be subject to typos. Remortgages and short sales can result in more shares than actually exist. Well, here's the Dole Foods story where shareholders ended up owning 33% more than expected. This is a challenge because there is no global representation of the state of ownership at any one point in time. However, if you’ve been working in the crypto space for a while, you’ve probably heard that there are companies trying to solve this problem with blockchain: t-Zero, Securitize, etc. But, I bet you probably haven't heard of a company (Cadence) that is using Ethereum's mainnet to solve this problem in the niche finance space of securitized business lending.

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Finding High Yield in a Low Yield World

Before delving into its solutions, I want to briefly describe how I found Cadence and what their business offers me as an investor.

Gone are the days of earning a 5% yield on bonds and other low-risk lending. Peer-to-peer lending, once seen as a way for small investors to tap into the earnings of bank lending, is now being squeezed out by the institutions that were supposed to replace them. As interest rates fell, investors began to have to seek yield in riskier assets: high-yielding dividend stocks, low-grade bonds and real estate. Where do you invest your money when money is cheap and the world is flooded with dollars?

There are quite a few companies that allow accredited investors to invest in these assets, however, they often require large amounts of capital, or do not have access to a transparent understanding of where their assets are going. Then, I stumbled upon Cadence. They make it easy to invest as little as $500, they integrate Bloomberg Terminal, their website is intuitive, and they offer competitive returns. Then, I learned that they are using the Ethereum mainnet in the background. make a deal! I had to try it.

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Figure 1. Investment example

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Figure 2. Example of Loan Offer Structure

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Gradual replacement of the underlying architecture

When I spoke to its founder, Nelson Chu, I asked him, "Why put these transactions on Ethereum?" He said that they use Ethereum so that everyone's wallet can "fully reflect their transaction activity." , it can be the perfect audit trail".

think about it! Perfect audit trail! The crypto community has been talking about this idea for years. And now, we see that dream come true. It's on the Ethereum mainnet. Each investor gets an Ethereum address for their ERC-20 token, which represents an allocation of their specific investment. They can go to Etherscan and view these tokens. The term sheet of the transaction points to a specific contract on Ethereum, which represents all the owners (pseudonyms) and their assignments.

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 mistype a contract's allocation, they can issue a new contract.

But Nelson has long-term strategic plans. When it comes to bigger deals, like the just-completed Fat Brands entire business securitization deal, institutions expect those securities to be tradable.

Here's what he said:

“So, actually, we have a path to securitization of assets that people want to trade vs. other people just tokenize things that people aren’t interested in liquidity. So when the trustee needs to make a distribution, when the bank wants to When it comes to secondary market transactions, tokens will play a bigger role in understanding who owns them and when.”

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

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Mainnet as a strategic advantage