Key points to remember
- Lending and borrowing date back to 2000 BCE in Mesopotamia with the invention of simple loans.
- The industrial revolution launched new innovations in finance through the use of carbon-based fuels and the replacement of animal labor with machines.
- Lending and borrowing as we know it today began in the 1950s with the very first payment by credit card.
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The birth of cryptocurrencies ushered in a new era of finance. It promises unauthorized financial primitives, improved intercontinental payments, and fertile ground for the creation of previously unavailable products and services.
For these reasons, entrepreneurs, developers and creative thinkers have entered space in droves.
However, understanding how humanity got here will help enthusiasts separate true innovation from regressive carbon copies.
Plant seeds of the common loan
Nowadays there are a myriad of types of loans. Some offer borrowers immediate access to cash if they are faced with an emergency; others allow borrowers to access larger sums to start businesses. The initial collateral required and the interest a borrower has to pay on the loan depend on a variety of factors.
For example, payday loans can charge triple-digit percentages to borrowers and have been the focus of much controversy in modern times.
Loans are one of the earliest financial instruments ever recorded in human history, dating back 4,000 years in Mesopotamia. Records from that time reveal how farmers borrowed seeds for sowing to repay the lender at harvest.
A seed would produce a plant which would produce even more seeds. So loans of this nature made sense.
The farm animals were loaned in the same way. Instead of new seeds, of course, the loan would be repaid with any offspring of the animal.
The invention of money, be it seashells, silver coins, Bitcoin or whatever, has its roots in this system.
As civilizations developed and planned over much longer periods of time, humans needed a better payment mechanism than tons of grain or herds of cattle. Not surprisingly, the boom in lending and borrowing, efficient mediums of exchange, and basic accounting practices all emerged simultaneously. Each component supported the other. And with each emergence of a new good or an asset deemed valuable by the company, there was someone to offer a loan against it. The most recent example: lines of credit backed by cryptocurrencies, which were launched by Nexo.
Indeed, lending and borrowing are truly one of the building blocks of our society.
How technology is advancing finance
Technology has played a disproportionate role in advancing the state of money and value. Just as societies based on agriculture gave rise to simple loans and borrowings, the industrial revolution accelerated this trend.
The use of new fuel sources and new machinery increased production while decreasing input. While a bull could effectively plow the land needed to plant crops, the bull also needed many resources to do so. Machines, however, don’t.
Yet, farmers seeking to improve their efficiency by becoming a more competitive environment had to find ways to invest in more machinery. For a farmer living on cattle labor, it was difficult to establish a surplus large enough to make such an investment.
This is one way the industrial revolution created a greater need for credit. It wasn’t just the farmers either.
Work began to centralize in different cities around the world. Workers began to congregate in Manchester, Chicago and elsewhere, leading to mass urbanization. And like their agricultural counterparts, workers needed a roof over their heads and beds to sleep on. Without a surplus, workers drew on credit to make ends meet.
With an increased need for credit and workers enjoying more stable income, new types of financing have emerged. These included installment plans, home mortgages, and the inevitable financial consolidation of all of these offers.
With these also came the social stratification defined between the haves and have-nots.
It is not difficult to see the trajectory of finance, particularly lending and borrowing, by examining its historical roots. From this base, FICO scores have emerged along with credit cards and various new technologies that have accelerated various paper processes.
Examples include Quicken Loans, which took advantage of emerging internet technologies, allowing users to take out loans from the comfort of their own homes. As the name suggests, Quicken has sped up what used to be a rather cumbersome process.
Blockchain technology is simply the next chapter in this story.
The next era of lending and borrowing
The rise of fintech and cryptocurrencies ushers 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 traditional large centralized entities from the borrowing / lending equation or to be used by FinTechs as a way around problems. existing in the loan space. While crypto firms are more of a radius than the hub of this dynamic, there is an array of centralized and decentralized lending and borrowing services. Each offers its own advantages and disadvantages to users.
The decision between the two comes down to whether users have chosen to trust the code or a company with custody of their funds.
Giving people access to capital that they would not otherwise have access to is a powerful idea. Yet it wasn’t until 2018 that a centralized company emerged with a plan to do just that. This company was Nexo, the company behind the first crypto-backed credit service and our case study for this new form of lending. Nexo harnessed the potential of blockchain to create a secure, borderless borrowing and lending platform, eradicating the inefficiencies and vulnerabilities of centralization.
Blockchain smart contracts enable Nexo and its clients to make deals that will automatically be executed by the company’s proprietary algorithm if both parties comply with their terms. This algorithm, and not biased third parties, ensures that the terms of a contract are met and protects both the lender and its clients from defaults.
The fully digital nature of cryptocurrencies also allows Nexo to instantly offer credits in over 200 jurisdictions and over 40 fiat currencies, making the service geographically borderless. When it comes to overcoming socio-economic barriers, the lender’s lines of credit are accessible to anyone with the necessary crypto-collateral to secure their loan. Customers can also take out as little as $ 10, making flexible and profitable credit accessible to underbanked and unbanked groups.
The borrowing and borrowing rates of this new generation of credit institutions also largely eclipse those of today’s major lenders (i.e. banks). On the Nexo platform, the credit is billed at an APR as low as 5.9% with no credit score taken into account. The company also offers users up to 12% return on staked cryptocurrencies, stablecoins, and fiat.s.
While users may experience slightly higher returns on decentralized alternatives, tradeoffs include rates that rarely hold up and underdeveloped platform security (as a new phenomenon, decentralized platforms quite often suffer from bugs and hacks).
Either way, users who enter 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 also receive renewed attention.
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