Cryptocurrency + Internet Finance, subverting the world like Gutenberg’s printing press

Original title: Internet Finance
Author: TheiaResearch, Crypto Kol
Compiled by: zhouzhou, BlockBeats

Editor 's note: This article compares the impact of the Internet financial system with that of Gutenberg's printing press, and believes that Internet finance will significantly reduce financial transaction costs, break traditional financial monopoly, promote the free flow of global capital, and promote economic growth. Through de-permissioned cloud servers and smart contracts, Internet finance can optimize capital allocation, risk management and financial innovation.

The following is the original content (the original content has been edited for ease of reading and understanding):

Our fund concept is completely based on the Internet financial system, which is the cornerstone for which we are worthy of life and death. We often work hard to explain the prospects and significance of the Internet financial system to our friends and investors.

This is a difficult task because the existing financial system is mostly abstract to consumers - especially those in developed countries who are content with existing financial infrastructure - whereas what we are trying to build , still in the conceptual and esoteric future stages.

This article brings together some of our classic ideas to help you explain the Internet financial system to friends, family, and customers.

Together we are building the Internet Financial System (IFS) - a better cloud-based financial system that can carry global assets and provide financial services to 8 billion people. We believe that the Internet financial system is a paradigm shift in global financial activities, just like Gutenberg's printing press brought about in the field of knowledge production and dissemination.

Unify server and smart contract code

Let’s discuss two fundamental differences between existing financial systems and Internet financial systems. This is the most technical part of the article.

You might think that the financial system already works on the Internet because you can access banking or brokerage services online, but the Internet is just an interface through which you send your order, just like you would place an order with a pizza delivery shop. Pizza isn't made on the Internet, and neither are your financial transactions.

The existing financial system operates through a series of isolated servers. There are more than 90,000 financial institutions worldwide, and most of them use internal servers that are not accessible from the outside. Your bank loan is just one entry in these servers. Any asset you have in the global financial system—whether you own it or owe it—is an entry in one of these siled servers.

If you own real estate in the United States, you probably know that your title is registered on federal, state, and local servers, and only a handful of authorized administrators can send transactions to these servers. This is what we call the "privileged orphan server" problem.

Financial institutions use standards like SWIFT and ACH to transfer money and share data. However, these standards require multiple steps and human supervision because of differences between the underlying databases. When communicating between cross-border financial institutions, you need to rely on local government agencies like central banks and international institutions like the Bank for International Settlements. The process is expensive, cumbersome and slow, riddled with reams of paperwork and high-paid staff. This is the problem with high transaction costs associated with privileged, orphaned servers.

Two problems arise from building financial systems on privileged servers. The first problem is this: Starting a financial services company is hard—really hard. You need to find a "gatekeeper" that allows you to post transactions into the network of permissioned, isolated servers we call the global financial system.

You also have to pay them well. This is the problem of too high barriers to entry for financial start-ups. Another related issue is that financial institutions have privileged access to entire regions. For example, three banks control more than 50% of the Colombian market share, and you need to work with them to lend money to Colombian businesses.

A similar situation exists in the market structure of most emerging economies. Each country has local financial institutions that act as "gatekeepers" to access domestic market opportunities and use this privileged position to extract rents. This is what we call the "local bank oligopoly" problem.

Note that so far we have explained the “privileged siled server” problem and how it leads to onerous transaction costs, high barriers to financial startups, and problems with local banking oligopolies.

In a permissioned server system, establishing a financial startup faces high barriers to entry.

Most countries have some financial institutions that act as "gatekeepers" to local opportunities.

Let’s take a look at one of the core advantages of Internet finance: code that makes promises. This is the basis of smart contracts. Chris Dixon likens smart contract code to a vending machine where you put in a dollar and get a bottle of Coca-Cola. Smart contracts allow you to write code that responds to input in a predetermined way. For example, when a smart contract receives a dollar, it can release a bottle of Coke.

Alternatively, it can release the collateral when it receives full principal and interest payments. Smart contract code can automatically distribute dividends to shareholders, rebalance investment portfolios, and manage capital structure tables based on preset logic.

The beauty of smart contract code is that it allows you to automate most financial activities and expands the design space of financial products you can create. Take an escrow agreement as an example. When you purchase a home, the escrow agent holds the funds and deeds and releases the assets until both parties fulfill their commitments (for example, the seller cannot take the funds and then default on the agreement).

Smart contract code means you no longer need an escrow agent – ​​just an escrow contract that checks both assets and releases them when the appropriate conditions are met. You can automate various types of transactions - for example, a loan marketplace that enforces penalties on a payment schedule and releases collateral; life insurance that pays out benefits upon receipt of a certified death certificate; and automatically receives streaming payments every time a song is played on Spotify copyright contract. The design space is so vast.

Existing financial systems cannot use smart contract code and rely on a network of isolated, permission-controlled servers. The Internet financial system is built on a permissionless, unified server using smart contract code. So, what does this mean?

The Internet financial system is a step forward for our civilization

1. Internet finance allows capital to flow freely across national

borders.

The Internet financial system is global because it is built directly on the open Internet. Physical distance becomes less important. You can send money instantly across the globe for less than a cent. Funds in Dubai can invest in Colombian car loans. Hoteliers in Indonesia can raise funds from global capital markets without having to pay high interest rates to the local banking system.

Most people have seen the remittance statistics – people send more than $900 billion to each other every year and pay an average fee of 7%. The remittance industry is imposing a $60 billion global tax bill. About US$670 billion (about 75%) of remittances flow to low- and middle-income countries, where remittances can account for more than 20% of GDP. There are no additional costs for sending money over the Internet because Internet finance itself does not recognize national borders. Sending money is just an update to the unified server, and it costs the same as a transfer between any two accounts (<$0.01).

Our existing financial system, based on isolated servers with permissions, cannot achieve the free cross-border flow of capital. Each local banking oligarch uses its privileged position over remittance recipients—controlling local servers and access to and from the bank—to extract rents. Taking remittances as an example, this dynamic is easy to understand because we intuitively know that a hard-working immigrant should not have to pay the 7% fee to send money to his mother. By 2025, the cost of sending money should be less than $0.01.

For most of us, observing the same extractive processes in various areas of the global financial system is more difficult because these costs are a more abstract layer. However, we can approximate the true cost of the local banking oligopoly by looking at the net interest margin (NIM)—that is, the difference between a financial institution's borrowing costs and the fees it charges for lending. Globally, net interest margins are typically higher in regions with less developed financial systems - typically between 5% and 10%, but the number can be larger.

The economic distress caused by excessive net interest margins is difficult to exaggerate. A banking system with extractive net interest margins means that mortgages cost more than they should. Higher mortgage costs mean fewer people can afford a home, which means fewer homes are being built.

This situation can be extrapolated to the entire economy. More expensive business loans mean that hard-working entrepreneurs need to pay more "rent" to local banks, and fewer entrepreneurs start their businesses. In Nigeria, a young professional couldn't afford her car loan, so she couldn't accept a job offer 50 minutes away. Extractive net interest spread affects all levels of society, it means lower GDP growth and fewer employment opportunities.

The global Internet financial system solves this problem by providing large investors with more high-yield and diversified investment opportunities, especially in less developed economies.

Let's say you run a diversified high-yield fund in Dubai and think Colombian car loans offer good risk-adjusted returns. It was not easy for Dubai-based funds to gain access to Colombian car loans under the existing permissioned, siled server system. The fund could look for a fund of funds (FoF) in New York that has a relationship with a local credit fund in Colombia, but that already involves three layers of fees.

Following the framework of the Internet financial system, Colombian car dealers issue car loans directly on the blockchain. This way, they find the lowest cost of capital because that's where the highest liquidity is. An algorithm sorts Colombian car loans based on predicted default rates and allows a Dubai-based fund to precisely screen for the investment exposure it needs.

You should envision a globalized system where capital can move easily around the world for the most efficient use; a financial system where net interest margins are compressed to the cost of capital.

Another example – a hotelier in Indonesia raised funds over the internet rather than paying high fees to the local banking system. Why do we assume that hoteliers prefer to raise funds directly on the Internet? This is because of the important concept of auction network effects.

If you wanted to sell an old game console, like the Sega Dreamcast, you'd go where the buyers are, because that's where you're most likely to find the highest bidder. Likewise, people who want to buy will go where there are the most sellers, because more sellers means a higher probability of finding someone willing to sell at a reasonable price.

This is why most markets tend to be winner-take-all outcomes. The Chicago Mercantile Exchange (CME) dominates the traditional derivatives market, the New York Stock Exchange dominates the U.S. equity and fixed income markets, and eBay dominates the global SEGA market.

Auction network effects are why we expect the Internet to become the deepest capital market in the world. The Internet will become a global market between all types of people who need capital and those who have capital to distribute, providing the lowest cost of capital.

We do not mean to suggest that national financial regulation and capital controls will disappear in the face of Internet finance. Although the underlying financial system will be global and allow free movement of capital across borders, sovereign states will still layer their laws and regulations on top of it.

Just because technology allows you to do certain things, it doesn't mean those things are legal or allowed. You can think of Internet finance as similar to cars. It allows humans to do things that were previously impossible, but it does not mean that it is completely exempt from local laws. However, we expect that national laws will adapt to Internet finance as economic policy and financial regulation consistently adapt to technological developments.

2. The Internet financial system will improve the property rights

protection of 5 billion people around the world.

The existing global financial system does not provide secure property rights for most people. While some advanced economies have strong security of property rights, most emerging markets still rely on savings in assets that are vulnerable to devaluation, expropriation and arbitrary legal systems.

The world's 20 largest emerging markets, with a combined population of more than 5 billion, have an average Heritage Equity Score below 43. A rating this low means your property rights are dependent on politics, often subject to bribery and favoritism. This means you could invest in a piece of land for ten years, only to find out that the local governor's brother added his name to the land registry and became its owner.

A score of 43 means you might have invested in a local stock, only to find out that the largest shareholder—a well-connected businessman—restructured the company at the expense of minority shareholders. This means that the business you may have worked so hard to run is expropriated by local connections or rendered uncompetitive due to arbitrary taxes, fines, and restrictions. Investment is very difficult in countries with weak property rights security.

If you live in a country like the United States, Australia, or Europe—where most readers probably live—you may not fully understand this dilemma, since you are most likely living in a country with a property rights score approaching 95.

The world's 20 largest emerging markets have a combined population of more than 5 billion, and their average Heritage Equity Score is below 43. The problem of weakened property rights security is intertwined with arbitrary money supply growth. More than 80% of the world's population lives in a high-inflation environment - defined as annual money supply growth of more than 12% over the past 30 years. Most people are forced to hold their own currency due to limitations in local banking systems and payment channels.

There are many ways to lock capital in fiat currency - such as controlled exchange rates, high fees to convert to dollars, or even direct orders from governments. These currencies cannot survive without capital controls because people would rather hold low-inflation dollars than high-inflation domestic currencies.

In emerging markets, holding dollars is difficult, and savings evaporate as a result. On average, the local currency loses 65% of its value against the US dollar every fifteen years.

Saving in an environment of weak property rights and high inflation is like climbing a soapy iceberg. You can choose to save in pesos, but over time most of your savings will slowly evaporate; or you can invest in local assets, but then you will live under the sword of Damocles of an arbitrary property rights system .

We haven’t even mentioned the issue of financial exclusion. About one-third of the world's adults are unable to open a bank account, which means more than 1.4 billion adults have no access to any financial system. The number of people without credit and good savings options is even greater.

Stablecoins provide these people with an opportunity to hold U.S. dollars directly in the Internet financial system without relying on the local banking system. In just five years, the total number of stablecoins has grown to $200 billion.

The next step for global property rights security is for the United States to allow trusted companies like BlackRock to tokenize real-world assets such as stocks, bonds, and ETFs through a regulated custody model. The assets will be held by regulated U.S. institutions and the government can seize them from sanctioned accounts at any time.

Imagine shares of Apple, Amazon, Google and Berkshire Hathaway being on the chain alongside the S&P 500 and Nasdaq. This would provide better savings options for billions of people around the world while expanding the base of U.S. asset holdings.

High-quality assets on the Internet will provide people in emerging markets with better ways to save, which in itself is a positive change. We also expect that emerging markets will strengthen their own property rights protection through Internet financial instruments. A reforming government could place land registration directly on a globally unified property rights server, thus avoiding corruption by local governments. For example, companies in Uruguay can embed minority shareholder protection directly into their smart contract code to better protect the legal rights and interests of their assets.

This may seem like a naive prediction, but from a mathematical perspective, it's actually quite promising. The long-term crux of the property rights problem in emerging markets is that weeding out corruption is very difficult, and even if successful, subsequent governments are likely to overturn these small achievements. Property rights reform is a problem that N governments must solve together, and each government must pay attention to property rights from a multi-generational long-term perspective.

The tools of Internet finance simplify the issue of property rights reform into a problem that can be completed by a single government. As long as a reforming government puts land registration on the Internet financial system, this decision will be difficult to reverse.

3. The Internet financial system will put global assets on the chain

and promote financial innovation

The existing financial system does not allow small companies to access global capital markets. This means smaller companies have to pay more capital costs and rent to intermediaries. In terms of population, the world's 20 largest emerging markets include 3.5 billion people and 8,457 listed companies. You can't connect them, for example, Mexico has a population of 128 million people but only 133 companies listed on the market. This is not enough.

Even in the United States, similar problems exist. The number of public companies available to investors in the United States, which once peaked at more than 8,000, has dropped by half in the past 20 years. The listing process is cumbersome and expensive (over $2 million plus 5-7% of IPO proceeds, plus long-term reporting and compliance costs).

We have started to see explosive growth in the number of financial assets on the chain. For example, Pump.fun — a memecoin launch platform based on Solana — has launched more than 5 million unique tokens since March 2024. Metaplex has launched over 9 million non-fungible tokens (NFTs) in the past 3 years.

Many observers underestimate the scale of these achievements because they confuse the quality of on-chain assets (mainly memecoins and JPEG NFTs) with the quality of the financial infrastructure behind them. In fact, the real signal is how easy it becomes to launch assets on the internet once the high entry fees that act as a barrier to liquidity in the traditional financial system are removed.

We expect that there will eventually be regulatory requirements for tokens to be listed, but any reasonable requirement will result in a more than 90% reduction in issuer costs.

Since March 2024, more than 5 million tokens have been launched on the Pump.fun platform.

We predict that in the future, small businesses will be able to obtain equity and debt financing directly through the Internet. We’ve already discussed small business owners in emerging markets. Mid-sized businesses in the United States will also be able to trade on liquid markets, giving everyone around the world access to the best-performing asset class of the past four decades.

The variety of instruments available for corporate finance will continue to evolve to accommodate cheaper, more flexible infrastructure. Apple could issue a hybrid debt product with daily payments of 10% of each iPhone's sales. Starbucks could issue revenue-sharing tokens just for its 200 new stores in the Pacific Northwest, and the market price could provide management with feedback on the value of the expansion plan.

The Cambrian Explosion will not only be reflected in the growth in the number of assets. We also expect the pace of financial innovation to accelerate significantly. Consider some of the products that already exist in the Internet financial system, which can serve as a preview of possible future developments.

1. A universal margin account allows you to borrow against houses, stocks, Bitcoin, or even assets that are only eligible as collateral in a smart contract-based financial system (such as music copyright revenue streams).

2. Arbitrary options refer to investors drawing a payment chart and designing a matching financial instrument through algorithms, which is achieved by combining existing financial products. Without smart contracts, constructing an arbitrary option would require an experienced options trading team and several lawyers, but with smart contracts it can be done in seconds. The key advantage of arbitrary options is that they provide cheaper and more tailored hedging solutions.

3. Deep and global prediction markets can improve the quality of predictions we use in daily decision-making. In the 2024 election, prediction markets have demonstrated their ability to better predict Biden’s surprise loss and the final election outcome. Imagine if there were prediction markets at the beginning of COVID-19, or the beginning of the conflict between the United States and Iraq. Prediction markets would be better at integrating information than most experts and exposing the best information. They can help people make better decisions and hedge against global conflicts and adverse election outcomes.

4. Yield-secured credit cards reduce the lender’s risk while increasing the borrower’s interest rate. You can hold the property as an NFT and pay for it with a credit card that can increase your mortgage limit up to a certain limit. Adding good collateral can lower interest rates by as much as 10%.

5. Decentralized exchanges have reduced the cost of issuing liquid assets by 1,000 times. This is exactly the example we mentioned earlier with Pump.fun and Raydium. DEX also reduces trading fees for retail investors, who only pay a single spot fee, as opposed to the 1-5% fees charged by retail trading platforms such as Coinbase and Robinhood.

6. The Lending Agreement allows customers with compatible collateral to borrow, competing with the competitiveness of the U.S. corporate debt market. On the Euler platform, anyone with an Internet connection can borrow U.S. dollars with ETH at an annual interest rate of less than 7%.

7. Futarchy is a way of making smarter decisions by leveraging the predictive power of markets. A classic example is a fierce activist movement calling for the resignation of a company's CEO. The board could set up a futuristic market that allows investors to buy shares on the condition that the current CEO resigns or remains in office. Boards of directors can look to market prices to help make decisions.

These are just some of the “from 0 to 1” innovations in the Internet financial system. Low barriers to entry allowed for low-risk experimentation in financial design, resulting in many failed projects but also some remarkable innovations. Innovation in the traditional financial system is inhibited by high barriers to entry and experimental costs.

Take University of Chicago professor Steve Budish, for example, who designed batch auctions to solve many of the problems faced by high-frequency trading (HFT). However, Professor Budish was unable to convince any major Wall Street firms to adopt his design because existing financial institutions were unwilling to experiment in the extremely valuable world of high-frequency trading. On the contrary, some start-up teams directly implemented his design in the decentralized Internet after reading his paper, and some of them have achieved quite good results.

4. Internet finance is more efficient

Finance is an integral part of our civilization, and I greatly appreciate the work we do in financial services. We strive to understand how society should allocate resources, predict the future and fund worthy projects. We thoughtfully consider risk and mitigate it wherever possible. As John Maynard Keynes said, we strive to defeat the dark forces of ignorance and time that cloud the future.

However, we do devote significant resources to maintaining this permissioned, isolated server financial system. In the United States alone, there are 8.5 million financial services workers, accounting for more than 12.5% ​​of the nation's college-educated workers. Over the past few decades, approximately 20% to 30% of Harvard undergraduates have entered the financial services field. Even at top schools like Yale, the numbers are pretty close.

We can automate a lot of tedious financial work through smart contracts. We have seen some protocols exceed billions of dollars in transaction volume and loan size with small teams. Kamino manages $2.2 billion in capital with just 20 employees (more than $100 million per employee), while Raydium has completed over $550 billion in transaction volume with less than ten employees. These numbers still underestimate the efficiency of smart contracts, as both Kamino and Raydium can grow assets and transaction volume tenfold without significantly increasing team size.

The efficiency of smart contracts is difficult to overstate. A machine learning algorithm written by a small team of talented engineers was able to underwrite millions of loans globally. A global coffee company in Central America can use an open source asset-liability matching program to continuously hedge its commodity risk. A cleverly designed order book system could replace an entire floor of traders in midtown Manhattan. Smart contract code can increase the work efficiency of a senior lawyer tenfold. Imagine laptops replacing skyscrapers.

The nature of work in financial services will change. Brokerage work will mean designing order book mechanisms rather than connecting traders by phone on a busy trading floor. The underwriting effort will mean a distinguished team of analysts-engineers writing algorithms and working with large language models (LLMs).

Liquidity investing would mean sifting through hundreds of thousands of financial assets to find a certain Thai industry leader whose shares should be trading at twice the market capitalization. There will be funds dedicated to prediction markets that will attract the brightest minds. There will be less paper work, more deep thinking, and financial services workers will be better at what they do best: forecasting, risk management, and capital allocation.

Let's take a brief detour and look at the financial reporting-industrial complex where this process is already unfolding.

In an isolated server financial system, many people are involved in the management of financial data. A mid-sized enterprise may have dozens of employees responsible for managing its various core systems (e.g., point-of-sale systems, enterprise resource planning, etc.). Accounting and finance teams spend hundreds of hours each quarter consolidating output data into tidy spreadsheets and making sure they match. Bankers and financial analysts will be working overtime trying to understand the data and feed it into financial models. Financial institutions will spend months tracking every expense and expense, conducting audits. Our world's financial data lives in the ruins of thousands of fragmented spreadsheets.

Internet finance solves this problem by uniformly storing financial data on cloud servers. A small team of data scientists only needs to build the financial reporting structure once for the raw data flow. As their business grows, they only need to spend a few hours each month maintaining the reporting code, and that's it. We are already seeing the beginnings of such a system, with data providers like Dune, Token Terminal and Artemis implementing it. With a very small team size, these data websites have covered the entire segment of the Internet financial system.

I myself have benefited from unified on-chain data. I once spent hundreds of hours building spreadsheet models of industrial transactions. This process required a small team, and the result was a static spreadsheet model that only we could manipulate and update, with each update taking dozens of hours. Now, it only takes us a few hours to build active, real-time models for on-chain businesses that update automatically. We used to spend months doing audits. Now, we run an on-chain fund and basically just send a few wallet addresses and answer some questions. The time and effort saved is truly exponential.

5. The Internet financial system will promote faster GDP growth

Joseph Schumpeter once pointed out that a more complex financial system can promote faster economic development. In the nearly 100 years since he proposed this idea, countless economic papers have verified his assertion through empirical data. Exact estimates vary, but doubling the depth of the financial system typically results in 50 to 100 basis points of annual economic growth over many years.

It is not difficult to understand why GDP will grow faster under the framework of the Internet financial system. Capital can flow across national borders to the best opportunities, unencumbered by local banking oligopolies. Net interest margins will narrow, lowering real interest rates in emerging markets. The high-quality asset selection provided by the Internet makes it easier for people in emerging markets to save and invest.

Stronger property rights protection directly drives GDP growth. Our financial services workers can spend more time on high-value forecasting, capital allocation and risk management. Innovative products like futarchy and prediction markets will bring higher quality information and capital allocation. There will be countless innovations to help companies better access capital and manage risk.

Famous nighttime map of North and South Korea illustrates the importance of property rights and inclusive economic systems

I believe that an additional 75 basis points of GDP growth is entirely possible. This represents an additional $15 trillion in GDP over 20 years. The equivalent of adding the entire economies of the UK, Germany, France, Russia, Italy, Brazil, Spain and Mexico to the global economy. It's worth a try.

Here, I would like to take this opportunity to make a brief introduction to those entrepreneurs and financiers who are preparing to transform into Internet finance. I believe that your individual GDP growth will be much greater than the additional 75 basis points per year. Entrepreneurs who are committed to Internet finance and build for the long term will receive generous returns. The global financial system is so profitable that even a 90% reduction in revenue would yield generational gains for startups. Financial services is the world’s largest market with the most potential for disruption.

A better financial system in the cloud

Internet finance is to the financial market what Gutenberg's printing press was to books, education and civilization. Before Gutenberg invented the printing press, fewer than 1,000 books were printed in Europe each year, and many of the most educated scholars worked as scribes on the continent. Books were virtually unavailable to all but the wealthiest - Dante Alighieri once boasted he owned 20 books - and constraints on book supply meant content was limited to the Bible and a handful of classics.

Everything changed when Gutenberg reduced the cost of printing books by more than 90%. In the 50 years after he invented the printing press, 20 million books were published, starting a revolution in publishing and learning that is still ongoing today. Writing books, buying books, and reading have become easier. We have witnessed an explosion of literary genres and literary talent. Literacy rates are rising around the world, and now every college freshman has the opportunity to read Aristotle's Politics.

The purpose of this article is to tell you why we are full of expectations for the Internet financial system. The two core innovations of permissionless, unified cloud servers and smart contract code reduce transaction costs and entry barriers, while destroying the entrenched oligopoly system. This is a paradigm shift with far-reaching consequences.

This is why there is so much noise surrounding cryptocurrencies. It is a dream—a noble dream—and it is achievable. The Internet financial system is a hammer blow to the world's rigid and predatory financial institutions. It was replaced by an open bazaar.