We briefly discussed universal capital markets prior but decided it warranted a longer post.

Blockchains are first and foremost a financial technology — cryptographically verifiable consensus enables the creation of universal capital markets.

Capital markets are inefficient

Let’s zoom out and look at existing capital markets — equities, bonds and credit are the backbone of the economy.

Yet capital markets are inefficient — national monetary policy and legislation prevents capital from flowing seamlessly internationally.

1. Monetary policy: central banks can incentivise borrowing or lending by changing interest rates as they control the issuance of currency. National monetary policies create a forex risk for investors which dissuades them from investing in certain jurisdictions.

2. Legislation: the strength of the body of law, the stability of a political regime, the financial regulation and jurisprudence make national capital markets more or less attractive. Even within the Eurozone where monetary policy doesn’t affect capital markets, legislation does.

   1. For example, the fact that positive credit scores are banned by law in France dissuades international banks from entering the market and competing, making the french credit market less efficient.

Onchain universal capital markets

Credit: DeFi as a poster child

DeFi lending is not directly affected by subjective monetary policy. Interest rates are determined by the balance of tokens in a lending pool, based on supply and demand.

In addition, with smart contracts code is law. Lenders and borrowers can audit the smart contract that determines what constitutes a guarantee (what type of collateral is accepted) and what triggers a liquidation, without ever needing to know or interact with each other.

Billions of dollars are borrowed on decentralized protocols like Aave, Compound, and Curve without the need for KYC, credit scores, or any personal information about the borrower.

DeFi is still in its infancy

However, the vast majority of DeFi lending does not involve productive capital such as working capital or long-term investments. Rather, it mostly consists of speculators seeking leverage. Undercollateralized lending is necessary for a productive and thriving onchain economy.

The lack of predictable and recurring revenue, diversified treasuries, KYC’d business owners and rules around debt recovery makes onchain business lending particularly difficult.

However, despite the bear market, the interest rate spikes and the implosion of CeFi, DeFi has kept on functioning as planned. We applaud projects like Maple, Goldfinch, Trufi, Huma, Atlendis and Centrifuge that counter the overcollateralised and speculative nature of DeFi by bridging the onchain and offchain worlds with RWA.

For DeFi to truly replace the current financial system, we cannot rely on onchain claims to offchain assets guaranteed by paper contracts that will be adjudicated on in a foreign country (oracle problem). We are convinced that, in the long run, the collateral source needs to be birthed (and not bridged) onchain. We believe INCs are the missing link to scale universal capital markets : they will bring the right guarantee levels and they will end credit spreads worldwide.

So far we focused exclusively on universal credit markets, we also believe INCs will unlock universal equity markets.

Equity markets

By issuing governance tokens (effectively shares), companies can fundraise onchain and tap into an international pool of investors, accredited or not, without intermediaries whenever they see fit. Although ICOs were predominantly Ponzi schemes, they were the first Ethereum usecase to find PMF and served as a perfect example of permissionless universal access to "equity markets".

The ongoing legal debate in the US regarding whether tokens are securities or commodities may lead the SEC to regulate onchain equity markets under securities law. While we see teams and investors that pump tokens before dumping them on retail as a damaging cash-grab that goes against web3 ideals, we are convinced that a universal equity market would be net beneficial for humanity.

Exposure to equity markets is the simplest way to benefit from economic growth. However, over the last few decades, the number of public companies has decreased. This has resulted in retail investors having fewer options when selecting equities. The S&P 500 has been a fantastic source of wealth creation, with an average yield of 7% over the last 150 years. Unfortunately, the majority of people do not have an easy and cheap access to the S&P 500 due to its permissioned nature (need for a custodian/broker, KYC, country restrictions, poor UX, high fees, prohibitive taxation etc.).

Tokens have offered permissionless access to both hyper-capitalist (money creation) and hyper-communist (community ownership of >80% of tokens) ideals. Like NFTs, ERC20 tokens are a powerful primitive that has, to date, mostly been used for speculation and rug pulls. However, tokens hold the promise of universal, permissionless and immediate access to the means of production and the benefits of human ingenuity.

We believe the appropriate level of protection for retail investors includes:

• Non-transferable tokens for the team until the INC has matured and achieved good commercial traction.

• A lightweight IPO process in which an independent body reviews and underwrites the business's quality.

• An educational test for retail investors who want to invest pre-IPO, as opposed to the net worth test currently required to qualify as accredited investors.

Limits of onchain capital markets

While onchain organisations benefit from tapping into universal capital markets for both debt and equity, these markets are still nascent and limited :

INCs are the missing link to move from an onchain bearer asset economy to an onchain contractual asset one.

Additional financial advantages of web3 beyond universal capital markets

In addition to universal capital markets, INCs benefit from an infinite appstore of financial products, enabling them to easily:

1. diversify and manage their treasury,

2. hedge themselves against FX risk and inflation,

3. borrow, stake or lend on liquid markets open 24/7 without bureaucracy,

4. transact with parties without trust (streams & escrow),

5. raise capital from international investors in a matter of hours (not weeks),

6. send money internationally and atomically for cheaper than currently possible.

By uploading the business substrate (the company) to a stateful internet, INCs will lead to the creation of universal capital markets. INCs will break down the barriers to access efficient, mature and permissionless credit and stock markets worldwide.