The Art and History of Lending
Lending has been around for quite some time now, and the function of lending is expected to continue to thrive for centuries to come. It is likely that there will be markets in the future. Lending will thrive as long as there are those who need to purchase assets or goods, and there are those who have the propensity to save and seek to earn more with their cash savings.
In a lending scenario, one person or group of people seeks funds to perform an economic transaction. This financial transaction carries with it, a cost for both the lender and the debtor. The former has the opportunity cost of allocating the money to another asset or good that may provide better returns, and the latter must pay interest on their loan amount. They both incur costs but engage within the transaction for different reasons.
The first instances of lending, experts note, took place more than 2,900 years ago in Ancient Rome or Greece. This art of credit would find significant opportunity within this era because of the significance of commerce within the Mediterranean region. Lenders in this period would likely have held a form of collateral to minimize the risk of a total loss. Lenders would either accept goods, or labor in exchange for money, leases of lands, or commodities.
The systems of lending would evolve to include variants of modern personal loans and money facilitation. Now, we have secured loans, credit cards, unsecured loans like personal loans, demand loans, mortgages, and institutions such as the Federal Reserve which have an impact on the money supply, allowing a contraction in the credit or an expansion of credit.
Much of banking, primarily credit, was based on relationships, and visits to your local bankers or financiers. It has changed rapidly over the past 40 years.
The Modernization of Banking
Thanks to the advent of technology, we now have robust systems that allow for the deployment and management of capital via banking institutions on a large scale. Online banking promised a lot of convenience and simplicity in banking. It has indeed lived up to that promise. This concept of an increase in technology has allowed for more commerce, more transactions, and more economic output. It has also allowed for a rise in fraud and the eventual rise of fraud detection and prevention, for cyber attacks and cybersecurity to thwart bad behavior.
One can now send money in minutes to another person across the world. Simple platforms like Paypal, Venmo, Stripe Capital, Square, and others, allow individuals and businesses to send and accept money from people as quickly and efficiently as possible. This simplicity enables commerce and provides for security and safety provided by these intermediaries.
At the same, these new platforms come with issues of their own. These issues include censorship resistance, excessive restrictions imposed by governments, and possible exorbitant fees. Users of these platforms also know that a misunderstanding between the platform and user activity can result in frozen accounts and endless headaches for post freeze resolutions.
Thankfully, technology has evolved and has presented potential solutions to this problem.
The Rise of Decentralized Finance
As of late, we’ve seen the growth of the blockchain and resulting use cases such as decentralized finance. First, one was also able to see the birth of bitcoin, a non-correlated asset and financial system that allowed for censorship-resistant stores of value and payment transfer via the bitcoin ecosystem. Then, we were able to see the next iteration of blockchain-based applications through Ethereum, a virtual machine that allowed for crowdsourced fundraising, hosting of other applications, and decentralized finance.
Users could now conduct peer to peer loans, act as a lender, be a borrower, collect interest, and speculate on the growth of their cryptocurrency assets. Depending on the wallets that they use, they can perform these transactions in a decentralized fashion. For those that seek a more safe, secure, and done for you type of platform, institutions such as Celsius, Compound, MakerDAO via DAI, and others allow for more streamlined peer to peer transactions. While a few, if not all of these are subject to some regulatory risk, one can certainly benefit. These benefits can appear in a meaningful manner. Users can lend or borrow against their crypto assets and collect interests.
The decentralized finance sector is still in its early stages and refines itself regularly.
Let’s take a look at one entity that’s performing a compelling role in this emerging sector.
Celsius
One decentralized project, Celsius, has shown that one can issue tokens, generate demand, and build a business that provides value to users, as well as to accrue nominal value for the utility token. The entity raised more than $40 million in a token offering which took place in 2018. This crypto lending provider allows crypto asset holders to deposit cryptocurrencies with them and collect interest on their assets. Individuals may also borrow against their collateral and receive cash loans from Celsius. To date, the entity has done more than $2 billion in the origination, has an associated $300M in assets, and works with more than 30,000 wallets. These figures not only show that there’s demand for these decentralized finance services, but it also shows that value is yet to be tapped. Celsius CEL tokens still retain the same amount after their initial token offering and continuous demand is still apparent.
This is one of several projects within the decentralized finance sector that has been able to survive and thrive through the bear market.
One can state that this entity has found a way to find revenues while also improving the user experience (providing higher interest rates and allowing for utility of crypto assets).
Celsius provides a way for users to earn higher yields while also minimizing their interest rates on their collateral based cash loans.
At the same time, due to its more streamlined nature, its not fully open source, users don’t know how their deposits are loaned out, to whom, and the terms of the agreement. This lack of transparency can allude to unknown risks within the system.
At the same time, it makes sense for the business (i.e Celsius) to not report such information, as it serves as a piece of material information and confidential to the business in an emerging market such as cryptocurrencies.
The ZB Take
The current projects focused within this sector must optimize for creating and growing a thriving business. As such, there might be initial frictions while they seek to unlock further value within the cryptocurrency ecosystem. Value retention within this sector occurs with more individuals and institutions finding ways to utilize their crypto assets to conduct various economic transactions.
About ZB Group
ZB Group was founded in 2012 with the goal of providing leadership to the blockchain development space and today manages a network that includes digital assets exchanges, wallets, capital ventures, research institutes, and media. The Group’s flagship platform is ZB.com, the industry leading digital asset exchange. The platform launched in early 2013 and boasts one of the world’s largest trading communities.
ZB Group also includes ZBG the innovative crypto trading platform, and BW.com, the world’s first mining-pool based exchange. Other holdings include wallet leader BitBank, as well as exchange brands ZBM, ZBX and Korea’s BitHi.
Industry intelligence and standards are headed by the recently launched ZB Nexus who embody the core values of ZB Group and open source their reports and analysis for the public.
Learn more about ZB Group by visiting www.zb.com.