Crypto Exchange Figure Markets Has a Plan to Democratize Finance

• Figure Markets combines alternative trading system capabilities with the cross-collateralization of crypto and traditional assets.

• MPC wallets tailored to the goal of providing a fully on-chain order book meet CEO Mike Cagney’s definition of a decentralized exchange.

• Figure is using about $100 million of its balance sheet as a catalyst to boost borrowing and lending.

At first glance, Figure Markets, the recently unveiled cryptocurrency exchange by serial entrepreneur Mike Cagney, looks like another post-FTX trading and custodial game aimed at institutions. But digging deeper reveals a spectrum of value propositions, from cost-cutting practicalities to visionary disruption.

Key components include: an alternative trading system (ATS), a broker-dealer license, the ability to cross-collateralize crypto and real assets, and borrowing and lending using Figure Technologies’ balance sheet as a catalyst for to make things progress. All this is supported by multi-party calculation (MPC), a largely decentralized order book and support from market maker Jump Trading.

It is entirely true that the billions of dollars in assets abandoned on FTX have prompted a rethink of crypto exchanges. For Figure Markets, the need to create an exchange arose from sister company Figure technologies‘ history of tokenizing non-crypto assets (over $30 billion since 2018) using the Cosmos-based Provenance blockchain built by the company.

By Cagney’s own admission, experimental efforts such as creating an on-chain market for private company stocks and trading Figure stocks on the ATS have failed to gain traction. Likewise, integrating heavyweights such as Apollo to trade on-chain fund interests also did not work.

Focus on market structure

Cagney remains cheerful about this learning curve. “These are two very popular business models that people are currently proposing for blockchain. We’ve done them both and I can tell you neither one works,” he said in an interview with CoinDesk. “So we decided to take a step back and look at the structure of the market. What came out is that Binance and Coinbase operate similarly to FTX, even after what happened there. They act as custodian and clearing agent.

The right direction was to use MPC, based on Jump Crypto. Silo offer, which represents a honed interest in safety it is analogous to self-custody and effectively reflects Cagney’s concept of “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). It instead features a limit order book, but one that is as close to being on-chain as it is technologically possible to deploy at scale.

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“We cannot reach a level where we can be competitive with Binance and Coinbase,” he said. “So you end up having to bring an order matching construct off-chain, where you write back into the chain every five seconds. For five seconds you are using a centralized order structure, but you are still not taking ownership of the important collateral.

Regardless, Cagney’s view is that MAIDs are not good for consumers. “Everyone looks at AMMs, but the reality is that AMMs are constantly exploited by market makers who sandwich shop the retail clients who trade on them. The real panacea lies in proper blockchain computation. But until then, we need to run off-chain episodic matching to simply achieve the throughput we need. This does not go against the thesis of decentralization, or at least is consistent with it.”

Market makers like Jump saw enormous value, both in the decentralization of Figure Markets and in the cross-collateralization possibilities. But another issue they pointed to was liquidity for lending and the ability to access capital from a lending perspective, Cagney said. “Look at the major crypto brokers, there are really only 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 deal with this problem, Cagney allocated about $100 million from Figure’s balance sheet to keep the lending wheel spinning.

“What’s really interesting is how you can democratize prime financing, so you don’t need an introducing broker,” Cagney said. “You just need to attach your wallet to exchange and trade. I don’t need Robinhood, I don’t need Schwab, I don’t need TD [Ameritrade], and the whole primary system. Ultimately, we end up with a complete overhaul of how financial markets work, in a way that is extremely disruptive but extremely creative for all players in the ecosystem.

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