- Lending and borrowing date back to the 2,000 BCE in Mesopotamia with the invention of simple loans.
- The Industrial Revolution kickstarted further innovations in finance via the use of carbon-based fuels and replacing animal labor with machines.
- Lending and borrowing as we know it today began in the 1950s with the very first credit card payment.
The birth of cryptocurrencies has ushered in a new era of finance. It promises permissionless financial primitives, improved intercontinental payments, and fertile ground for creating products and services previously unavailable.
For these reasons, entrepreneurs, developers, and creative thinkers have entered the space en masse.
Understanding how humanity got here, however, will help enthusiasts separate true innovation from regressive carbon copies.
Planting Seeds of the Common Loan
These days, there are myriad types of loans. Some offer borrowers access to immediate cash if they’re facing an emergency; others allow borrowers access to larger sums to start businesses. The collateral needed upfront and the interest a borrower must pay on the loan depends on various factors.
For instance, payday loans can charge three-digit percentages for borrowers and have been the center of much controversy in modern times.
Loans are one of the first-ever recorded financial instruments in human history, dating back 4,000 years in Mesopotamia. Records from this time reveal how farmers would borrow seeds to sow to pay the lender back upon harvest.
One seed would generate a plant that would produce even more seeds. Thus, loans of this nature made sense.
Farm animals were lent in the same way. Instead of new seeds, of course, the loan would be repaid with any of the animal’s offspring.
The invention of money, be it shells, silver pieces, Bitcoin, or otherwise, finds its roots in this system.
As civilizations grew and planned over much longer periods, humans needed a better payment mechanism than tons of grain or cattle herds. It comes as no surprise that the rise of lending and borrowing, effective mediums of exchange, and basic bookkeeping practices all emerged simultaneously. Each component supported the other. And with every emergence of a new good or asset deemed valuable by society, there was someone to offer a loan against it. The most recent example: cryptocurrency-backed credit lines, which were pioneered by Nexo.
Indeed, lending and borrowing are truly one of the building blocks of our society.
How Technology Advances Finance
Technology has played an outsized role in pushing the state of money and value forward. Just as agriculture-based societies gave rise to simple lending and borrowing, the Industrial Revolution accelerated this trend.
The use of new fuel sources and machines increased the output while decreasing the input. Though a bull could effectively till the land needed to plant crops, the bull also needed many resources to do so. Machines, however, do not.
Still, farmers looking to improve their efficiency in becoming a more competitive environment needed to find ways to invest in more machines. For a farmer subsisting off the labor of livestock, establishing a large enough surplus to make such an investment was difficult.
This is one way the Industrial Revolution created a greater need for credit. It wasn’t just agriculturists either.
Work began to centralize within different cities around the world. Workers began congregating in Manchester, Chicago, and elsewhere leading to mass urbanization. And like their farming counterparts, workers needed a roof over their heads and beds to sleep in. Without a surplus, workers tapped credit to make ends meet.
With a greater need for credit and workers who enjoyed a more stable income, new types of financing emerged. These included installment plans, home mortgages, and the inevitable financial bundling of all of these offerings.
With these also came social stratification defined between the haves and the have-nots.
It’s not difficult to see finance’s trajectory, specifically lending and borrowing, when examining its historical roots. Thanks to this base, FICO scores emerged with credit cards and various new technologies that sped up various paper-based processes.
Examples include Quicken Loans, which leveraged emerging internet technologies, allowing users to take out loans from the comfort of their homes. As the name suggests, Quicken expedited what had previously been a rather cumbersome process.
Blockchain technology is simply the next chapter of this story.
The Next Era of Lending and Borrowing
The rise of fintech and cryptocurrencies is ushering in the next generation of finance. Based on the ideas outlined above, the mechanism is quite the same. However, this era is also defined by the ability to disrupt some of the existing mediators of this process.
Unlike the Quickens of yesteryear, blockchain technology and cryptocurrency have the power to either completely omit large, traditional centralized entities from the borrowing/lending equation or be used by FinTechs as a means to bypass existing issues in the lending space. Though crypto firms are more of a spoke rather than the hub of activity in this dynamic, there exists a spectrum of centralized and decentralized lending and borrowing services. Each offers its own advantages and disadvantages to users.
The decision between the two boils down to whether users chose to place their trust in code or a company with custody of their funds.
Giving individuals access to capital that they wouldn’t otherwise have access to is a powerful idea. Still, it wasn’t until 2018 that a centralized company emerged with a plan to do this. That company was Nexo, the firm behind the first crypto-backed credit service and our case study for this new lending form. Nexo harnessed blockchain’s potential to create a secure and borderless borrowing and lending platform, eradicating the inefficiencies and vulnerabilities of centralization.
Blockchain smart contracts allow Nexo and its clients to enter into agreements that will automatically be executed by the company’s proprietary algorithm if both sides comply with their terms. This algorithm, and not biased third parties, ensures a contract’s conditions are met and protects both the lender and its clients from defaults.
Cryptocurrencies’ entirely digital nature also enables Nexo to instantly offer credit in over 200 jurisdictions and 40+ fiat currencies, making the service geographically borderless. As for transcending socioeconomic barriers, the lender’s credit lines are available to anyone and everyone with the needed crypto-collateral to back their loan. Clients can also take out as little as $10, making flexible and cost-efficient credit accessible to underbanked and unbanked groups.
Lending and borrowing rates for this new generation of lending firms also largely overshadow those of the current go-to lenders (i.e., banks). On the Nexo platform, credit is charged at as little as 5.9% APR with no credit scores taken into account. The company also offers users a yield as high as 12% on staked cryptocurrencies, stablecoins, and fiat.s.
Though users may enjoy slightly higher returns on decentralized alternatives, the trade-offs include rates that rarely hold and underdeveloped platform security (as a new phenomenon, decentralized platforms suffer bugs and hacks quite often).
In either case, users entering this space are sure to outperform traditional banks. And as cryptocurrencies continue to capture the hearts and minds of the financial world, we can be sure that lending and borrowing will enjoy renewed attention as well.
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