Why Blockchain? How Heron Finance’s Investors Benefit from Blockchain Technology.

Heron Finance is built on the Goldfinch protocol, which uses blockchain technology. We’re often asked, “why are you using blockchain? What are the benefits?”

As the cofounder and CTO of Warbler Labs, the parent company of Heron Finance, and a former senior engineer at Coinbase, this is a topic that’s dear to me. So I wanted to use this article to answer those questions directly (for other general questions about blockchain and Heron Finance, see our article here.

The short answer is that we use blockchain as the “rails” for moving assets, and the benefits to Heron Finance investors are reduced cost, increased transparency, and greater interoperability. But let’s dive deeper.

Blockchain Can Do for Money What the Cloud Did for Documents

To start, let’s quickly recap what “the blockchain” is, and why it’s interesting.

The blockchain is like a big shared computer. The fundamental breakthrough of blockchain technology was allowing for “distributed consensus” that is also permissionless, which makes it as if everyone on the planet is on the exact same computer, capable of viewing and operating on the same data as everyone else.

Another way to think about this, is that the blockchain provides a single source of truth.

To understand the power of creating a single source of truth, let’s consider how impactful it was when documents moved from hard drives to the cloud.

Before the cloud, a user would write a document on Microsoft Word or similar, email to a friend or colleague, and that person had to download the document in order to update it, then email the updated version back^[1]. The process was manual and time consuming.

The cloud changed all of that. Now, all versions of the document can be merged into a single source of truth–the cloud–where multiple users can update the document and view each other’s changes without having to download and email. This enabled users to collaborate in real-time, and other applications for adding signatures, charts, etc. can all seamlessly integrate with your cloud document^[2].

We believe that blockchain can do for money what the cloud did for documents.

It creates that single source of truth for financial information.
This degree of transparency and interoperability is unprecedented in modern finance. Just think of how many financial intermediaries exist simply to establish trust between counterparties and perform basic contracting functions like clearing, settlement and record-keeping. Blockchain’s single source of truth can replace all of those^[3], while enabling an entirely new ecosystem of integrations to flourish.

Thanks to blockchain technology, modern finance has the capacity to transform from siloed to interoperable, from intermediated to direct, from solo to collaborative. Blockchain sets the table for truly “open finance”.

But let’s get even more specific than that. What exactly are the advantages of a blockchain-based platform like Heron Finance?

Reduced costs

The most immediate and obvious benefit of using blockchain is the reduced cost of money transfer^[4]. This is especially true when transferring funds internationally, as it can cost 1.4%-2.95% + $0.30 to do so^[5]. Double that for withdrawals, and you’re talking about nearly 6% in fees. Investment products compete on 1-2% differences in yields, so those transfer costs are meaningful, to say the least.

Even domestically, when accepting bank payments (which are much cheaper than credit cards), it can be 1% for deposits and withdrawals each, plus tens of thousands of dollars per month in flat fees for businesses like ours^[6].

Blockchain enables any amount of money to be transferred anywhere in the world for literally pennies^[7]. Here’s a recent transaction on the blockchain we use (called Base) where someone sent $50k for 11 cents. That’s 0.00022%, or about 4500X cheaper than a 1% fee on an equivalent amount. They could have sent $5k or $500k and the fee would still be 11 cents, so the comparison will vary, but you can see how substantial the difference is. (Side note: those costs will come down even more after an upcoming Ethereum upgrade^[8]. When was the last time your bank upgraded its system to reduce your fees?)

Enhanced Transparency and Open Source Code

Imagine going to the grocery store and seeing only the marketing claims of the food packages, with no ingredient list. You might be concerned about what you’re actually putting in your body, and rightfully so!

Lack of transparency harms trust, and in the context of markets, it means higher costs and less overall economic activity. But that’s exactly what investors in traditional finance face. There’s no trusted way to verify what’s going on under the hood.

Blockchain enables a different level of trust for investors. This is a truly unique aspect of the blockchain–every transaction is anonymized, yet fully public, and cannot be changed by anyone (including us)^[9]. Even the code that runs onchain is viewable by anyone, and guaranteed to run exactly as shown^[10].

This means there’s nowhere for us to hide. What a breath of fresh air compared to traditional private markets!

Consider the 2008 Great Financial Crisis. Collateralized Debt Obligations (CDOs) were largely responsible for the collapse of the housing market and the fall of major banks like Bear Stearns and Lehman Brothers, yet few on Wall Street even knew what CDOs were during the run-up to the crisis^[11]! Had there been a single source of truth at the time (blockchain technology), many would have recognized the danger CDOs posed, which is why several of the Treasury’s key recommendations post-crisis focused on increasing transparency^[12]. According to Andy Agathangelou, Founding Chair of the Transparency Task Force: “If we have a market that's terribly opaque (…) we significantly increase the chunks of the crash. So, our cause is to make the markets far more transparent, knowing that one of the values that will deliver to everybody is a more stable financial ecosystem^[13].”

In other words, high-transparency markets are ultimately safer, stronger, and more durable than those where only a few insiders understand the financial underpinnings.

It is also worth noting the code that Heron Finance is using to facilitate loan repayments and money movements is built on top of the open-sourced and audited Goldfinch protocol. The Goldfinch protocol has been battle-tested with over $110M in loans since 2020, with zero security incidents. It has also received some of the highest marks from third-party security rating agencies, including landing in the top 7%, out of hundreds of projects rated by DeFi Safety^[14]. And by leveraging open source code, Heron Finance can rely on the crowd of security researchers to continuously help improve the platform by fixing bugs and addressing issues as they arise. The Goldfinch protocol actually heavily incentivizes this group by maintaining an ongoing $500k ‘bug bounty’ program that has already paid out over $100k in rewards to numerous security researchers who have disclosed incidents before they cause any damage.

The Power of Interoperability

Imagine if every email service, tech company, and phone manufacturer ran their own proprietary “internet”, and none of them could talk to one another natively.

Want to send a message to your friend in Britain or Nigeria? Well, first you have to send it to a message middleman who charges a fee. Want to share a link to a funny video? Better hope your friend uses the same video app you do, or it will take more time (and you’d likely have to pay another fee) to transfer it across networks. In fact, this would be so cumbersome that entire companies would probably spring up just to support users who want to cross network boundaries.

Luckily the internet doesn’t work like that! But sadly this is exactly how our current financial system works. Want to send money to your friend in Britain or Nigeria? You first have to send it to a financial intermediary who charges a fee. Wiring from one bank to another? That could take a few days. Want to transfer your assets from one broker to another? First send snail mail to a clearing agency you’ve never heard of, and ask them nicely to move the shares. This process has become so normalized within our current financial system that we hardly question the inconvenience it poses. We just assume ‘that’s the way it has to be.’

Blockchain can change all of that.

By layering financial products on top of an interoperable, blockchain-based platform, many different companies can spring up to operate on the same underlying platform, thus fostering more competition, and ultimately creating more value for the user.

For example, maybe you like Heron Finance’s investments, but you really love Apple’s latest finance app. You would simply be able to transfer your positions from your Heron Finance wallet to your Apple wallet in a single click. Or maybe you want to borrow against your loans for cash now–another company completely unrelated to Heron Finance might offer that service, and you could take advantage by simply transferring your Heron Finance positions to their app, all while still earning yield with Heron Finance. We can also see ratings agencies develop, secondary or derivatives trading, or insurance markets. The interoperability of blockchain makes it all possible in a way that it simply wasn’t before.

All of this has the potential to lower costs, improve returns, reduce risk, and even include billions of people around the world who are currently unbanked and underbanked into our global financial system.

The Risks of Blockchain

While we believe blockchain has the power to transform modern finance (and by extension, our entire world), it’s worth acknowledging some of the drawbacks. We cover these in more detail here, but the main point to keep in mind is that the technology is still maturing, and that can have implications for security and user experience.

Heron Finance mitigates this risk in multiple ways, starting with a world-class engineering team that has experience developing secure products for some of the best companies in the world, including Coinbase, Airbnb, PayPal, Meta, and others. And Heron Finance was developed on the battle-tested Goldfinch protocol, which has managed over $110 million in AUM[^16] and raised funds from over 6,000 customers, with zero security incidents. In addition, by leveraging best practices like unit testing, bug bounties, code reviews, and external audits, Heron Finance seeks to proactively address any potential threats before they arise.

Building the Future We Want to See

One of the core motivations behind any startup is not waiting around for the future to arrive, but building the one you want to see yourself. At Heron Finance, we want to see a financial system that’s global, transparent, interoperable, and open by default.

Blockchain enables exactly that, by paving the way for a bright future of open and interoperable financial tools. Some are already available, like the ability to transfer an investment to any standard crypto wallet. Others, like using another platform to borrow against your investment, or selling a portion of your investment on a third party exchange, are not available yet.

But these are the promises of blockchain technology–reduced costs, transparency and interoperability. You own your investments, and you can do with them what you want, when you want, with whomever you want.

That’s our stake in the ground, and the future we’re building towards. It’d be a pleasure to have you join us.

• Blake West
  Co-Founder and CTO
  Warbler Labs | Heron Finance