How Blockchain Is Reshaping the Way We Raise Wealth
To most Americans, credit seems as natural as sunlight. It’s not something that many question, and when the time comes to pay for a product or service, whether it’s a bit of food at the grocery store or a long-needed haircut, the credit card unfailingly issues forth.
However, such widespread financialization hasn’t always been the case. That isn’t to say that credit in one form or another hasn’t existed for thousands of years — because it has. At its essence, credit represents debt. David Graeber’s excellent book *[Debt: The First 5000 Years](https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years)* gave the world a look at how debt has affected the development of rites, customs, economies, laws, and more — essentially touching upon everything that constitutes human society.
Before the global rise of credit card use (which took off in earnest in the 1970's[^Matt Phillips. *[Quartz](https://qz.com/142269/its-the-most-important-change-in-the-us-economy-since-the-great-recession-that-nobody-is-talking-about/)*.]), there were few ways to pay for things, and all of them were local. Charge accounts existed at department stores and other local institutions wherein familiar patrons were given the freedom to spend as long as they paid their balance in full by the end of the month. Similar arrangements were made on an individual basis between families and the local grocery store, butcher, tailor, and so on.[^John Steel Gordon. *[How Credit Cards Fueled Global Economic Growth](https://bankingjournal.aba.com/2017/08/how-credit-cards-fueled-global-economic-growth/).*]
Apart from these somewhat special arrangements, people paid with cash or check to buy what they could afford. In pre-World War II America, buyers weren’t spending on luxury goods and international travel unless they could afford it. If they couldn’t *afford* it — and this heralds the modern context — people took out loans from the local bank.[^Joseph Nocera. *[The Day the Credit Card Was Born](https://www.washingtonpost.com/archive/lifestyle/magazine/1994/11/04/the-day-the-credit-card-was-born/d42da27b-0437-4a67-b753-bf9b440ad6dc/?noredirect=on&utm_term=.a0b26dfb706f).*]
How did people manage to buy things they couldn’t afford before modern banking? The answer to this question is where things start to get interesting!
Economies prior to banking relied on peer-to-peer trust. Even if you weren’t borrowing from a first-degree connection, the second or third-degree connection that you did eventually borrow from came down through a network of familiar contacts. The local merchant who sold on credit was *trusted* by the priest of the town, who acted as a layer of protection to both parties.[^John Atkins. *[A Brief History of Lending](https://www.selflender.com/blog/online-lending-history).*]
With globalization’s incremental advance, local networks began disappearing and trust along with them. Movement became more frequent, and people arriving at new towns or countries didn’t have any local contacts to finance themselves. These conditions gave rise to banks as intermediaries who replaced local sources of debt with official institutions for them.
Credit, loans, mortgages — these are all forms of debt, but, they are also forms of fundraising. While the conditions for returning to peer-to-peer fundraising models disappeared for several decades, the internet has allowed peers from around the world to re-work the old paradigm. Startups like Kickstarter and GoFundMe reintroduced the idea of sourcing funds from peers, and not banks — but were, and remain, limited in scope (they exist mainly for a specific goal, so the scope is user-limited in nature. They also don’t function well for general purpose loans and other personal needs).
Blockchain, a distributed ledger technology, is changing that classic structure and is putting trust back between peers, allowing for a paradigm shift in the way people raise money and create wealth.
Blockchain Is Changing the Nature of Ownership
Of the many reasons why people will skirt traditional banking is if there exists another route to raising funds for a loan, a primary one is banks are not very competitive. They set exorbitant rates, create their own rules, and systemically limit the lengths they will go to provide their clientele with advantages over their competitors. The result is a cartel-esque ecosystem wherein there are few advantages between going through one bank or another.[^Victoria Finkle. *[Banks are running out of time to regain public trust](https://www.americanbanker.com/opinion/banks-are-running-out-of-time-to-regain-public-trust).*]
The sudden explosion of ICOs (Initial Coin Offerings) is indicative of the fact that if there is a way around banks, people will take it. ICOs are a method for crowdfunding based on blockchain technology. Instead of using centralized trusted intermediaries like banks to raise *X* amount, a person or party can *pitch* their crowdfund to an international audience who contribute to the idea using cryptocurrency. Lending money on the blockchain works in the same way.[^Peter Daisyme. *[Using Peer-to-Peer Lending As A Method For Startup Growth](https://www.forbes.com/sites/theyec/2017/07/26/using-peer-to-peer-lending-as-a-method-for-startup-growth/#2f27106150f3).*]
In a nutshell, blockchain-based loans take us back to the era of trust between peers, wherein people borrowed directly from one another based on reputation and a solid network of familiarity. The blockchain equivalent updates that model with the decentralized ledger which keeps an immutable account between peers who never met and may exist on opposite ends of the globe.
Blockchain-based lending takes the trust that made peer-to-peer models work in the past and weaves it into the network itself, creating a friction-less fabric between people that tosses the need for banks out of the equation. Using blockchain, borrowers and lenders interface directly over a level playing field that ensures honesty from both sides. In such a context, a borrower can freely get their request financed without banking borders, and because the field of possible lenders opens as wide as it does, rates to fulfill the loan become incredibly competitive.[^Michael Ryan. *[How Blockchain Could Reshape the Mortgage Industry](https://www.americanbanker.com/opinion/heres-how-blockchain-could-help-the-mortgage-industry).*]
Ethereum, a blockchain network that is second only to Bitcoin in popularity, introduced smart contracts as a way of facilitating the cryptographic exchange of anything of value within a network where users are blind to the faces behind the other end of their transactions. Smart contracts are self-enforcing bits of code that execute conditions agreed upon in advance by two counterparties. Think of them as if/then machines: If a borrower’s financial history meets a certain list of criteria, then they are eligible for a loan.[^CoinTelegraph. *[What Are Smart Contracts?](https://cointelegraph.com/ethereum-for-beginners/what-are-smart-contracts-guide-for-beginners#what-are-smart-contracts-for)*] These powerful tools can help lenders vet counterparties and greatly increase the efficiency of their lending process.
These systems are not only useful for loans, but for financing and creating fractional ownership of hitherto unaffordable items. Blockchain and the smart contracts running on top of it enable the tokenization of anything of value. Real estate, jewelry, ideas, businesses — anything can be represented by a token on the blockchain and those tokens can be fractionally purchased and owned by the masses.
The tokenization of sectors of our economy opens up more vehicles for investment and for funding. For people living in liquidity gaps, future blockchain financing could provide short-term lending of commercial paper at scale that could compete with the commercial paper markets of today. Cash shortages, poverty gaps, and the inability to make ends meet are familiar problems of the human condition. The future that my peers and I are creating addresses micro-financing, fractional tokenization, and infrastructure for dealing directly with each other, rather than through third-parties who always seem to take more than their fair share of any given transaction.
We need your help bringing forth this new era of banking. People with innovative ideas of blockchain should join a Discord group or a Reddit forum, or even a social media group. If you are a software developer, join a project and help unearth the future!
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