I’ve been very intrigued by blockchains ever since I was introduced to them, but over the last decade I’ve also been dissapointed that most of the impact the technology has created is tools for speculation.

I strongly believe that the borrower wants to pay less for their borrowings always, and the lender wants to get more for their money lent, always.

The UX of interacting with chains has gotten so much better vs when we built products on ethereum in 2016. From creating wallets with tools like Passkey to the much lower transactions times and speeds across multiple L2’s and L1’s it seems to me that we are getting much closer to a path where real world adoption is even feasible for different financial assets.

The only major hurdle I see is the connection of these assets to a digital entity and ensuring that this system cannot be exploited or tampered, which fortunately or unfortunately are in the hands of the regulators of governments across the globe.

One of the ecosystems that I came across through some articles and readings recently is the MBS market, the same ecosystem that caused the 2008 financial crisis. Interesting bitcoin and in turn blockchains were an invention right after the crisis as a response to a problem with centralised systems and their opaqueness.

Here’s some stats on why this is such an interesting space, the numbers are just mind boggling. This is just residential mortgage and doesn’t include commercial or any other type of mortgage.

• Out of the 14-16 trillion in mortgage loans about 10.4 trillion is securitized. The US leads the pack in securitization
  • Agency MBS is the largest of the pack : These are insured by a sovereign guarantee by the US government and are hence called agency MBS. The reason why investors love them is because they are fully insured by the US government in case of default.
  • The rest are much smaller
  • Most other countries have not yet jumped on the bandwagon but I see immense potential in general across the globe

Heres’ a cool excerpt from an article I read about the topic by Kevin Miao, who heads credit for Blocktower capital. His perspective is very interesting because he previously worked in citibank on similar instruments and saw the structural inefficiencies first hand.

Borrowers will always want lower interest rates and lenders will always want the highest return for their investments

Why do we know this? The core objective of every lender is to borrow money at X% and loan money at X+Y%, capturing a spread in the form of ongoing net interest margin (Y%) or through a one-time “gain on sale” of the underlying loan (roughly Y% * the effective duration of the loan). The cheaper the cost of borrowing (X%), the more profit you stand to make (until efficient markets drive down Y%). With that incentive, who would ever ask for a higher X%?

From the first modern clearinghouses in Liverpool, to the emergence of fractional reserve banking, to the proliferation of AI/ML in modern credit underwriting, driving down the cost of capital has long been the financial market’s north star. To this end, it’s hard to think of a more successful (or notorious) innovation than securitizations. Securitizations, archetypically mortgage-backed securities, are instruments which pool financial assets (loans) into tranches of debt that is subsequently purchased by investors.

Why are 14 service providers to do that? Let’s dig into the typical monthly flow of funds for a securitization: