Key Takeaways
- Borrowing and lending date back to the 2,000 BCE in Mesopotamia with the invention of simple loans.
- The Industrial Revolution started further innovations in finance by using carbon based fuel and replacing animal labor with machinery.
- Borrowing and lending as we know it today began in the 1950s with the very first credit card payment.
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The birth of cryptocurrencies has ushered in a new era of finance. It promises unauthorized financials, improved intercontinental payments, and fertile ground for creating products and services that were previously unavailable.
For these reasons, entrepreneurs, developers and creative thinkers have entered the space en masse.
However, understanding how humanity got here will help enthusiasts separate true innovation from regressive carbon copies.
Plant the Common Loan Seeds
These days, there are a myriad of loans. Some offer lenders instant access to cash in the event of a crisis; others allow lenders to access larger sums to start businesses. The collateral required in advance and the interest that a borrower must pay on the loan depends on various factors.
For example, payday loans can charge borrowers three-digit percentages and have been the focus of much debate in modern times.
Loans are one of the first ever 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 back the lender after harvest.
One seed would produce a plant that would produce even more seeds. So, loans of this nature made sense.
Farm animals were borrowed in the same way. Instead of new seeds, of course, the loan would be repaid with any of the offspring of the animal.
Inventing money, be it shells, coins, 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. Unsurprisingly, the rise in borrowing and lending, effective exchange mechanisms, and basic bookkeeping practices all emerged at the same time. Each component supported the other. And with every appearance of a new commodity or asset considered valuable by society, there was someone to offer a loan against. The latest example: credit lines backed by cryptocurrency, pioneered by Nexo.
Indeed, lending and borrowing are truly one of the building blocks of our society.
How Technology Advances Finance
Technology has played a major role in pushing forward the state of money and value. Just as agricultural societies led to simple lending and borrowing, the Industrial Revolution accelerated this trend.
The use of new fuel sources and engines increased output while reducing input. Although a bull could land below ground needed to effectively plant crops, the bull also needed a lot of resources to do so. However, machines do not.
Yet, farmers looking to improve their efficiency in becoming a more competitive environment need to find ways to invest in more machinery. For a farmer who subsided with livestock labor, it was difficult to establish a surplus large enough to make such an investment.
This is one way in which the Industrial Revolution created a greater need for credit. It’s not just farmers either.
Centralization began in 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 on. Without a surplus, employees tapped credit to make ends meet.
With a greater need for credit and employees enjoying a more stable income, new forms of financing emerged. These included installment plans, home mortgages, and the inevitable financial bundling of all these offerings.
With these also came a defined social stratification between the homelands and the unimportant.
It is not difficult to see the trajectory of finance, specifically lending and borrowing, when exploring its historical roots. Thanks to this foundation, FICO scores emerged with credit cards and various new technologies that triggered various paper-based processes.
Examples include Quicken Loans, which used emerging internet technologies, allowing consumers to take out loans from the comfort of their homes. As the name implies, Quicken accelerated what was previously a fairly onerous process.
Blockchain technology is simply the next chapter of this story.
Next Period Lending and Borrowing
The rise of fintech and cryptocurrencies is leading in the next generation of finance. Based on the ideas outlined above, the mechanism is pretty much the same. However, this era is also defined by the ability to disrupt some of the existing intermediaries of this process.
Unlike past Quickens, blockchain and cryptocurrency technology have the power to either completely exclude large central entities from the lending / borrowing equation or be used by FinTechs as a means to bypass existing space issues lending. While crypto companies are more of a talking point rather than a hub of activity in this dynamic, there is a spectrum of centralized and decentralized lending and lending services. Each offers its own advantages and disadvantages to consumers.
The decision between the two is about whether consumers chose to place their trust in a code or a company with custody of their funds.
Giving individuals access to capital that they would not otherwise have access to is a powerful idea. Yet it was not until 2018 that a central company emerged with a plan to do this. There was that company Nexo, the company behind the first credit service with crypto support and our case study for this new loan form. Nexo harnessed the potential of blockchain to create a secure and unlimited lending and lending platform, eliminating inefficiencies and centralization vulnerabilities.
Blockchain smart contracts allow Nexo and its clients to enter into agreements that will be executed automatically by the company’s proprietary algorithm if both parties comply with their terms. This algorithm, and not biased third parties, ensures that contract conditions are met and protects the lender and its clients from defaults.
The fully digital nature of cryptocurrencies also enables Nexo to offer instant credit in over 200 jurisdictions and 40+ fiat currencies, making the service geographically borderline. In terms of going beyond socio-economic barriers, the lender’s lines of credit are available to anyone and everyone with the necessary crypto-collateral to support their loan. Clients can also take as little as $ 10, making flexible and cost-efficient credit accessible to unbanked and unbanked groups.
Lending and lending rates for this new generation of lending companies also largely mirror current lenders (ie banks) rates. On the Nexo platform, credit is charged as low as 5.9% APR regardless of any credit scores. The company also offers consumers as high as 12% yield on stacked cryptocurrencies, fixedcoins, and fiat.s.
While consumers may enjoy slightly higher returns on decentralized alternatives, the compromises include rates that are often not captured and underdeveloped of platform security (as a new phenomenon, decentralized platforms suffer bugs and hacks quite often) .
In either case, consumers entering this space are guaranteed 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 lending will be given renewed attention as well.
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