Internet Finance

Author: TheiaResearch, Crypto Kol
Compiled by: zhouzhou, BlockBeats

Editor’s Note: This article draws an analogy between the internet finance system and the impact of the Gutenberg printing press, arguing that internet finance will significantly reduce financial transaction costs, break traditional financial monopolies, promote the free flow of global capital, and drive economic growth. Through permissionless cloud servers and smart contracts, internet finance can optimize capital allocation, risk management, and financial innovation.

The following is the original content (reorganized for readability):

Our fund philosophy is entirely based on the internet finance system, which is the cornerstone we are willing to live and die for. We often strive to explain the prospects and significance of the internet finance system to friends and investors.

This is a difficult task because the existing financial system is mostly abstract for consumers—especially for those in developed countries who are satisfied with the current financial infrastructure—while what we are trying to build is still in the conceptual and esoteric future stage.

This article summarizes some of our classic viewpoints, aiming to help you explain the internet finance system to friends, family, and clients.

We are collectively building the Internet Finance System (IFS)—a cloud-based, better financial system that can carry global assets and provide financial services to 8 billion people. We believe that the internet finance system represents a paradigm shift in global financial activity, just as Gutenberg's printing press did in the field of knowledge production and dissemination.

Unified Servers and Smart Contract Code

We discuss two fundamental differences between the existing financial system and the internet finance system, which is the most technical part of the article.

You might think that the financial system already operates on the internet because you can access banking or brokerage services online, but the internet is merely an interface through which you send orders, just like placing an order at a pizza delivery service. The pizza is not made in the internet, nor are your financial transactions.

The existing financial system operates through a series of isolated servers. There are over 90,000 financial institutions globally, most of which use internal servers that cannot be accessed externally. Your bank loan is just an entry in one of these servers. Any asset you own in the global financial system—whether you own it or owe it—is just an entry in these isolated servers.

If you own property in the United States, you may know that your ownership is registered on federal, state, and local servers, and only a few authorized administrators can send transactions to these servers. This is what we refer to as the "permissioned isolated server" problem.

Financial institutions use standards like SWIFT and ACH for transfers and data sharing. However, these standards require multiple steps and human oversight because of the differences between the underlying databases. When communicating between cross-border financial institutions, you need to rely on local government entities like central banks and international institutions like the Bank for International Settlements. This process is expensive, cumbersome, and slow, filled with a lot of paperwork and high-paid employees. This is the high transaction cost problem associated with permissioned isolated servers.

Building a financial system on permissioned servers has also led to two issues. The first issue is that creating a financial services company is difficult—really difficult. You need to find a "gatekeeper" who can allow you to publish transactions to what we call the network of permissioned isolated servers in the global financial system.

You also have to pay them handsomely. This is the problem of high barriers to entry for financial startups. Another related issue is that financial institutions have privileged access to entire regions. For example, three banks control over 50% of the market share in Colombia, and you need to work with them to lend to businesses in Colombia.

Most emerging markets have similar market structures. Each country has local financial institutions acting as "gatekeepers" to access their domestic markets, exploiting this privileged position to extract rents. This is what we call the "local bank oligopoly" problem.

Note that so far we have explained the "permissioned isolated server" problem and how it leads to heavy transaction costs, high barriers for financial startups, and the local bank oligopoly problem.

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

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

Let’s look at one of the core advantages of internet finance: the ability to make promises through code. This is the basis of smart contracts. Chris Dixon compares smart contract code to a vending machine, where you can get a bottle of Coke after inserting a dollar. Smart contracts allow you to write code that responds to inputs in a predetermined way. For example, when a smart contract receives a dollar, it can release a bottle of Coke.

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

The charm of smart contract code lies in its ability to automate most financial activities and expand the design space for financial products you can create. Take escrow agreements as an example. When you buy a house, the escrow agent holds the funds and the property deed until both parties fulfill their commitments (for example, the seller cannot take the funds without fulfilling 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 market that executes penalties and releases collateral according to a payment schedule; life insurance that pays out upon receipt of a certified death certificate; copyright contracts that automatically receive streaming payments whenever a song is played on Spotify. The design space is vast.

The existing financial system cannot use smart contract code; it relies on a network of isolated, permissioned servers. In contrast, the internet finance system is built on a permissionless, unified server using smart contract code. So what does this mean?

The Internet Finance System is a Step Forward for Our Civilization

1. Internet finance allows capital to flow freely across borders.

The internet finance system is global because it is built directly on the open internet. Physical distance becomes irrelevant. You can make global remittances instantly for less than a cent. Funds in Dubai can invest in auto loans in Colombia. Hotel operators in Indonesia can raise funds from global capital markets without paying high interest to local banks.

Most people have seen remittance statistics—people send over $900 billion to each other annually, paying an average fee of 7%. The remittance industry is imposing a $60 billion tax on the world. About $670 billion (approximately 75%) of remittances flow to low- and middle-income countries, where remittance amounts can account for over 20% of GDP. Remitting through the internet incurs no additional costs because internet finance itself does not recognize borders. A remittance is merely an operation updated to a unified server, and its fee is the same as any transfer between two accounts (<$0.01).

Our existing financial system, based on permissioned isolated servers, cannot achieve the free cross-border flow of capital. Each local bank oligopoly exploits its privileged position over remittance recipients—controlling local servers and access points—to extract rents. In the case of remittances, this dynamic is easy to understand because we intuitively know that a hardworking immigrant should not have to pay 7% to send money to their mother. By 2025, the cost of remittances should be less than $0.01.

For most of us, observing the same extraction process in various sectors of the global financial system is more challenging because these costs are a more abstract layer. However, we can approximate the true costs of local bank oligopolies by observing the net interest margin (NIM)—the difference between the borrowing costs of financial institutions and their loan charges. In regions where the financial system is less developed, the net interest margin is usually higher—often between 5% and 10%, but this number can be larger.

The economic plight caused by excessive net interest margins cannot be overstated. A bank system with an extractive net interest margin means that the cost of mortgages is higher than it should be. Higher mortgage costs mean fewer people can afford homes, which means fewer homes are built.

This situation can be extrapolated to the entire economy. More expensive business loans mean that diligent entrepreneurs have to pay more "rent" to local banks, resulting in fewer entrepreneurs starting businesses. In Nigeria, a young professional cannot afford a car loan, so she cannot accept a job opportunity 50 minutes away. Extractive net interest margins affect all levels of society, leading to lower GDP growth and fewer job opportunities.

The global internet finance system addresses this issue by providing larger investors with more high-yield and diversified investment opportunities, especially in less developed economies.

Suppose you operate a diversified high-yield fund in Dubai and believe that Colombian auto loans offer good risk-adjusted returns. Under the existing permissioned, isolated server system, it is not easy for a fund in Dubai to access Colombian auto loans. The fund might look for a fund of funds (FoF) in New York that has connections with local credit funds in Colombia, but this involves three layers of fees.

Under the framework of the internet finance system, Colombian car dealers can issue auto loans directly on the blockchain. This way, they can find the lowest capital costs, as this is where liquidity is highest. An algorithm can rank Colombian auto loans based on predicted default rates, allowing the Dubai fund to precisely filter the desired investment exposure.

You should envision a globalized system where capital can easily flow to the most efficient uses worldwide; a financial system where net interest margins are compressed to capital costs.

Another example—a hotel operator in Indonesia raises funds via the internet instead of paying high fees to the local banking system. Why do we assume that hotel operators prefer to raise funds directly on the internet? This is due to the important concept of auction network effects.

If you want to sell an old gaming console, like the Sega Dreamcast, you would go to the place with the most buyers because that’s where you are most likely to find the highest bidder. Similarly, those looking to buy would go to the place with the most sellers because more sellers mean a higher probability of finding someone willing to sell at a reasonable price.

This is why most markets tend to result in winner-takes-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 globally. The internet will become the marketplace between those needing capital and those with capital to allocate, providing the lowest capital costs.

We do not mean to imply that national financial regulation and capital controls will disappear in the face of internet finance. While the fundamental financial system will be globalized and allow for the free cross-border flow of capital, sovereign nations will still overlay their laws and regulations.

Technology may enable you to do certain things, but that does not mean those things are legal or permitted. You can think of internet finance as akin to automobiles, which allow humans to do things they could not do before, but that does not mean they can operate completely free from local laws. However, we expect that national laws will adapt to internet finance as economic policies and financial regulations consistently evolve with technological advancements.

2. The internet finance system will improve property rights protection for 5 billion people globally.

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

The 20 largest emerging markets in the world collectively have over 5 billion people, and their Heritage Foundation property rights scores average below 43. Such a low score means your property rights depend on politics, often influenced by bribery and favoritism. This means you might invest in a piece of land for ten years only to find that the local governor's brother has added his name to the land registry and become its owner.

A score of 43 means you might invest in a local stock only to find that the largest shareholder—a connected businessman—restructured the company at the expense of minority shareholders. This means that your hard-earned business could be expropriated by local networks or become uncompetitive due to arbitrary taxes, fines, and restrictions. Investing is very difficult in countries with weak property rights protections.

If you live in countries like the United States, Australia, or Europe—where most readers likely reside—you may not fully understand this predicament because you probably live in a country with a property rights score close to 95.

The total population of the 20 largest emerging markets exceeds 5 billion, and their average Heritage Foundation property rights score is below 43. The issue of weakened property rights is intertwined with arbitrary monetary supply growth. Over 80% of the global population lives in high-inflation environments—defined as having a monetary supply growth of over 12% per year over the past 30 years. Most people are forced to hold their local currency due to limitations in local banking systems and payment channels.

There are many ways to lock capital in fiat currencies—such as controlled exchange rates, high fees for converting to dollars, or even direct government orders. These currencies cannot survive without capital controls because people prefer to hold low-inflation dollars rather than high-inflation local currencies.

In emerging markets, holding dollars is difficult, resulting in the evaporation of savings. On average, local currencies depreciate by 65% against the dollar every fifteen years.

Saving in an environment of weak property rights and high inflation is like climbing on a soap-covered 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 have to live under the Damocles sword of arbitrary property rights.

We haven't even mentioned the issue of financial exclusion. About one-third of adults globally cannot open a bank account, meaning over 1.4 billion adults have no access to any financial system. The number of people without credit and good savings options is even larger.

Stablecoins provide these individuals with an opportunity—to hold dollars directly in the internet finance system without relying on local banking systems. In just five years, the total amount of stablecoins has grown to $200 billion.

The next step for global property rights protection is for the U.S. to allow trusted companies like BlackRock to tokenize real assets such as stocks, bonds, and ETFs through regulated custodial models. These assets will be held by regulated U.S. institutions, and the government can seize these assets from sanctioned accounts at any time.

Imagine if stocks of Apple, Amazon, Google, and Berkshire Hathaway were all on-chain alongside the S&P 500 and NASDAQ. This would provide better savings options for billions of people globally while expanding the ownership base of U.S. assets.

High-quality assets on the internet will provide better savings methods for people in emerging markets, which is a positive change in itself. We also expect that emerging markets will strengthen their property rights protections through internet finance tools. A reformist government could place land registries directly on a global unified property server, thus avoiding local government corruption. For example, Uruguayan companies could directly embed minority shareholder protections into their smart contract code, thereby better safeguarding asset rights.

This may seem like a naive prediction, but from a mathematical perspective, it is actually quite hopeful. The long-term crux of property issues in emerging markets is that eliminating corruption is very difficult, and even if successful, subsequent governments are likely to overturn these small achievements. Property reform is a problem that N governments must solve together, with each government needing to prioritize property rights over generations.

The tools of internet finance will simplify the issue of property reform to one that can be accomplished by a single government. As long as there is one reformist government that places land registries in the internet finance system, this decision is hard to reverse.

3. The internet finance system will put global assets on-chain and drive financial innovation.

The existing financial system does not allow small companies to access global capital markets. This means smaller companies have to pay higher capital costs and rents to intermediaries. By population, the 20 largest emerging markets include 3.5 billion people and 8,457 publicly listed companies. You cannot connect them; for example, Mexico has a population of 128 million but only 133 listed companies. This is far from enough.

Even in the United States, similar issues exist. The number of publicly listed companies available to investors in the U.S. once exceeded 8,000 but has halved over the past 20 years. The listing process is cumbersome and expensive (over $2 million in fees plus 5-7% of IPO proceeds, along with long-term reporting and compliance costs).

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

Many observers underestimate the scale of these achievements because they conflate the quality of on-chain assets (mainly memecoins and JPEG NFTs) with the quality of the financial infrastructure behind them. In reality, the true signal is how easy it has become to launch assets on the internet once the high entry fees that acted as liquidity barriers in the traditional financial system are removed.

We anticipate that there will eventually be regulatory requirements for tokens to be listed, but any reasonable requirements will lead to a reduction in issuance costs of over 90%.

Since March 2024, the Pump.fun platform has launched over 5 million tokens.

We expect that in the future, small businesses will be able to raise equity and debt financing directly through the internet. We have already discussed small business owners in emerging markets. Medium-sized enterprises in the U.S. will also be able to trade in liquidity markets, allowing everyone globally to access the best-performing asset classes of the past forty years.

The types of tools for corporate financing will continue to evolve to accommodate cheaper and more flexible infrastructures. Apple could issue a hybrid debt product that pays out 10% of each iPhone sold daily. Starbucks could issue revenue-sharing tokens solely for its newly opened 200 stores in the Pacific Northwest, with market prices providing management with feedback on the value of expansion plans.

The Cambrian explosion will not only manifest in the growth of asset numbers. We also expect the pace of financial innovation to accelerate significantly. Consider some products that already exist in the internet finance system, which can serve as indicators of potential future developments.

1. Universal margin accounts allow you to borrow against houses, stocks, bitcoins, or even assets that qualify only as collateral in a smart contract-based financial system (like music copyright income streams).

2. Arbitrary options refer to investors drawing a payment chart and designing a matching financial instrument through algorithms by combining existing financial products. Without smart contracts, constructing an arbitrary option requires 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, more customized hedging solutions.

3. Deep and global prediction markets can improve the quality of predictions we use in everyday decision-making. In the 2024 elections, prediction markets demonstrated a strong ability to better predict Biden's unexpected losses and the final election results. Imagine if there had been prediction markets at the early stages of COVID-19 or the U.S.-Iraq conflict; prediction markets are better at integrating information than most experts and publicly revealing optimal information. They can help people make better decisions and hedge against global conflicts and adverse election outcomes.

4. Yield mortgage credit cards reduce lenders' risks while increasing borrowers' interest rates. You can hold property as an NFT and use a credit card that can increase your mortgage limit to a certain extent. Increasing good collateral can lower interest rates by up to 10%.

5. Decentralized exchanges have reduced the issuance costs of liquid assets by 1,000 times. This is precisely the example we mentioned earlier with Pump.fun and Raydium. DEXs have also lowered trading costs for retail investors, who only need to pay a single basis point fee, unlike retail trading platforms like Coinbase and Robinhood, which charge 1-5%.

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

7. Futarchy is a way to make smarter decisions by leveraging market prediction power. A classic example is a fierce radical movement demanding the resignation of a company's CEO. The board could establish a futarchy market allowing investors to buy shares based on whether the current CEO resigns or continues. The board can refer to market prices to help make decisions.

These are just some "zero to one" innovations within the internet finance system. The low barriers to entry allow for low-risk experimentation in financial design, leading to many failed projects but also some outstanding innovations. Innovations in the traditional financial system are stifled by high barriers and experimental costs.

Take, for example, Professor Steve Budish from the University of Chicago, who designed batch auctions to address many issues faced by high-frequency trading (HFT). However, Professor Budish failed to persuade any large Wall Street firms to adopt his design because existing financial institutions were unwilling to experiment in the highly valuable high-frequency trading space. In contrast, some startup teams implemented his design directly in the decentralized internet after reading his paper, and some of these teams have achieved quite good results.

4. Internet finance is more efficient

Finance is an indispensable part of our civilization, and I greatly appreciate our work in the financial services sector. We strive to understand how society should allocate resources, predict the future, and fund worthy projects. We thoughtfully consider risks and mitigate them as much as possible. As John Maynard Keynes said, we work to overcome the ignorance that looms over the future and the dark forces of time.

However, we do allocate a significant amount of resources to maintain this permissioned, isolated server financial system. In the U.S. alone, there are 8.5 million financial services workers, accounting for over 12.5% of the college-educated workforce. Over the past few decades, about 20% to 30% of Harvard University's undergraduates have entered the financial services sector. Even top institutions like Yale University have similar numbers.

We can automate a large number of tedious financial tasks through smart contracts. We have seen that certain protocols have already surpassed billions of dollars in transaction volume and loan sizes with small teams. Kamino manages $2.2 billion in capital with only 20 employees (over $100 million per employee), while Raydium has completed over $55 billion in transaction volume with fewer than ten employees. These numbers still underestimate the efficiency of smart contracts because both Kamino and Raydium can grow assets and transaction volumes tenfold without significantly increasing team size.

The efficiency of smart contracts cannot be overstated. A machine learning algorithm written by a small team of excellent engineers can 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 risks. A cleverly designed order book system could replace an entire floor of traders in Midtown Manhattan. Smart contract code can increase a senior lawyer's productivity tenfold. Imagine a laptop replacing a skyscraper.

The nature of financial services work will change. Brokerage work will mean designing order book mechanisms rather than connecting traders through phone calls in busy trading halls. Underwriting work will mean outstanding analyst-engineer teams writing algorithms and collaborating with large language models (LLMs).

Liquidity investing will mean sifting through hundreds of thousands of financial assets to find a Thai industry leader whose stock should trade at twice the market capitalization. There will be funds specifically targeting prediction markets, attracting the smartest talent. Paperwork will decrease, deep thinking will increase, and financial services workers will be better at what they do best: forecasting, risk management, and capital allocation.

Let’s take a slight detour and look at the financial reporting-industrial complex, a process that has already unfolded within it.

In the isolated server financial system, many people are involved in managing financial data. A medium-sized enterprise might have dozens of employees responsible for managing its various core systems (such as point-of-sale systems, enterprise resource planning, etc.). Accounting and finance teams spend hundreds of hours each quarter integrating output data into tidy spreadsheets and ensuring they match. Bankers and financial analysts work overtime to understand the data and feed it into financial models. Financial institutions spend months tracking every expense and outlay for auditing. The financial data of our world lives in the ruins of thousands of fragmented spreadsheets.

Internet finance solves this problem by storing financial data uniformly on cloud servers. A small team of data scientists only needs to establish a financial reporting structure once for the raw data streams. As the business grows, they only need to spend a few hours each month maintaining the reporting code, and that’s it. We have already seen prototypes of such systems, with data providers like Dune, Token Terminal, and Artemis achieving this. These data websites have covered the entire segment of the internet finance system with very small team sizes.

I have also benefited from unified on-chain data. I used to spend hundreds of hours building spreadsheet models for industrial trading. This process required a small team, and the result was a static spreadsheet model that only we could operate and update, with each update taking dozens of hours. Now, we only need a few hours to build an active real-time model for on-chain businesses that automatically updates. We used to spend months on auditing work. Now, we operate an on-chain fund that basically only requires sending a few wallet addresses and answering some questions. The time and energy saved are truly exponential.

5. The internet finance system will promote faster GDP growth

Joseph Schumpeter pointed out that more complex financial systems can promote faster economic development, and countless economic papers have empirically validated his assertion since he made this point nearly 100 years ago. While specific estimates vary, doubling the depth of the financial system typically brings 50 to 100 basis points of annual economic growth over several years.

It is not hard to understand why GDP growth would be faster under the framework of the internet finance system. Capital can flow across borders to the best opportunities without being hindered by local bank oligopolies. Net interest margins will narrow, reducing real interest rates in emerging markets. The high-quality asset options provided by the internet make 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 provide higher quality information and capital allocation. There will be countless innovations helping businesses better access capital and manage risks.

The famous night maps of North Korea and South Korea illustrate the importance of property rights and inclusive economic systems.

I believe that an additional 75 basis points of GDP growth is entirely possible. This means an increase of $15 trillion in GDP over 20 years. Equivalent to adding the entire economies of the United Kingdom, Germany, France, Russia, Italy, Brazil, Spain, and Mexico to the global economy. It is worth a try.

Here, I would like to take this opportunity to make a brief pitch to entrepreneurs and financiers preparing to transition into internet finance. I believe that your personal GDP growth rate will far exceed an additional 75 basis points annually. Those entrepreneurs dedicated to internet finance and long-term building will reap substantial rewards. The global financial system is so profitable that even a 90% reduction in revenue would still yield results for startups over generations. Financial services represent the largest and most disruptive market globally.

A Better Financial System in the Cloud

The significance of internet finance to financial markets is akin to the impact of the Gutenberg printing press on 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 on the continent worked as scribes. Books were nearly inaccessible to anyone except the wealthiest—Dante Alighieri boasted of owning 20 books—the limitation on book supply meant that content was confined to the Bible and a few classics.

Everything changed after Gutenberg reduced the cost of printing books by over 90%. In the 50 years following his invention of the printing press, 20 million books were published, sparking a publishing and learning revolution that continues to this day. Writing, buying, and reading books became easier. We witnessed an explosive growth of literary genres and literary geniuses. Global literacy rates rose, 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 so optimistic about the internet finance system. The two core innovations of permissionless, unified cloud servers and smart contract code lower transaction costs and entry barriers while dismantling entrenched oligopolistic systems. This is a paradigm shift with far-reaching implications.

This is also why there is so much hype surrounding cryptocurrencies. It is a dream—a noble dream—and it is achievable. The internet finance system is a hammer against the rigid and predatory financial institutions of the world. It is an open marketplace that can take their place.