The Evolution of Money Markets
Over the millennia, lending has evolved dramatically, becoming more competitive and providing more attractive rates to participants.
Evidence of money markets (a financial market that facilitates lending and borrowing) has existed since ancient Mesopotamia in 3000 BC when farmers would secure loans to prepare for upcoming farming cycles and to pay for goods and services.
Fortunately, regulations around lending no longer codify that a borrower must bind their family into servitude for three years should they default on a loan.
This article looks at the history of modern-day lending and the natural evolution towards Nolus DeFi Leases as a purpose-made form of lending. While going through these periods, we note that Nolus offers borrowers a cost-efficient form of leverage that carries lower risk than perpetual protocols.
Lending through Financial Institutions
Financial institutions have offered loans to borrowers for over a thousand years. They have acted as an intermediary for depositors in abstracting the complexity of sourcing deals (borrowers) and conducting the necessary due diligence. They also support borrowers by ensuring sufficient capital is available for them to borrow from.
In exchange for these services, institutions will charge a fee which means that depositors receive lower returns than the interest paid on their assets.
Depositors and borrowers would both be required to KYC to enter into these arrangements. This mechanism also offers borrowers with undercollateralized loans and larger sources of collective liquidity that can offer competitive interest rates for large loans.
If we consider the purpose of Nolus, obtaining loans through financial institutions would also be very capital-efficient. However, the existence of intermediaries may result in higher interest rates (assuming liquidity sources are equal). Furthermore, Nolus safely offers access to all users, including those who may be unable to use existing institutions (i.e., poor credit ratings).
Modern P2P Platforms
Peer-to-peer (P2P) Platforms sought to remove the middleman from existing lending arrangements. Removing the middleman (and their associated fees) would allow lenders to receive a higher return and borrowers to pay a lower interest rate.
P2P lending was also a massive boon for large parts of the world where populations were unable to access financial institutions for loans. It also allows borrowers to access bespoke loans with variable sizes, maturity dates, and interest rates. This is not typically available with loans from financial institutions that would have more standardized arrangements.
From the perspective of Nolus’ vision, P2P platforms are typically a one-to-one arrangement which can make it difficult to find a counterparty that meets all the desired requirements for a loan. Furthermore, the off-chain nature of any collateral is likely to result in additional complexity and cost for the lender.
Traditional DeFi Money Markets
The advent of public blockchains quickly resulted in the creation of permissionless money markets. Early iterations of money markets facilitated the pairing of lenders and borrowers to conclude collateral-based loans. The fundamental premise of smart contracts and public blockchains offer borrowers a trustless and secure alternative to their predecessors.
These money markets used overcollateralized models that require borrowers to deposit more than they seek to borrow. This has been sufficient for several use cases such as “traditional” borrowing and opening a short position.
Innovation within the DeFi space has seen many improvements in the model such as isolated lending (which allows borrowers to separate their collateral for each loan) and UX benefits from leveraged looping protocols to maximize yield earned from yield-bearing assets.
When comparing this to Nolus’ potential for opening a leverage position on an asset, leveraged looping can offer users with a similar level of leverage to Nolus’ DeFi Leases. However, the nature of traditional money markets relative to Nolus’ Liquidity Providers’ Pool means that they will usually have lower liquidity (and therefore higher interest rates) than Nolus Protocol.
Leveraged Trading with Nolus Leases
Similarly, Nolus Protocol also offers a venue for permissionless borrowing. However, it provides lenders with purpose-made loans that are comparatively advantageous for gaining exposure to assets. Conveniently, this target market is the vast majority of the crypto industry who use money markets or perpetual protocols to gain additional exposure to an asset.
Nolus’ DeFi Leases allow borrowers to get loans of up to 150% of the collateral provided by borrowers. This works by locking the collateral and proceeds in a smart contract instance that the Protocol can control. This is more capital-efficient than traditional DeFi money markets, allowing traders to gain greater leverage.
As shown in our 2024 Roadmap article, one of the major updates coming in Summer 2024 is the addition of volatile base currencies. To date, Nolus Protocol has accepted $USDC deposits which allow traders to open leveraged long positions against a volatile asset. However, this is only half of the usual trading experience. This smart contract update will enable borrowers to use volatile assets, unlocking the ability to open short lease positions across various assets and markets.
Conclusion
Advancements in technology have resulted in greater opportunities for borrowers. This has manifested in lower interest rates, increased access to funding, and faster approval times. Permissionless blockchains have further extended these benefits and provided borrowers with a trustless and secure mechanism to enter these loans.
Nolus Protocol benefits from these technological advancements in offering a purpose-built lending mechanism to allow borrowers to enter a leveraged position on an asset. This will extend in 2024 to allow borrowers to enter leveraged positions against an asset.
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