Where is Debt Heading?
Debt is something that many of us live with. There’s good debt and there’s bad debt, but where is it heading today and how does DeFi fit in?
In our latest episode on YAP Cast, we focus on where debt is heading. To talk more about this, we’re again joined by Sidney Powell, co-founder of Maple Finance, a decentralized institutional marketplace, which enables trusted institutions to borrow and lend money. Below are a few areas covered in our latest episode.
Beggar Thy Neighbour
When it comes to lending and borrowing, we tend to do this with people we know really well, and what we lend out we expect to see a return of. According to Charles R. Geisst, an academic and writer, who authored a book about finance called ‘Beggar Thy Neighbor,’ charging interest is one of the oldest financial practices and is seen as being predatory with the lender seeking to take advantage of the borrower. Regardless of whether loans were taken out in cash or in kind, immoral lenders were said to practice a ‘beggar-thy-neighbour’ policy by making sure that borrowers where disadvantaged to such a point that they risked losing their freedom or families.
Yet, what we consider a normal business function has always sat on the fringes of moral law. For that reason, it’s worth while to look at the state of the debt capital markets to understand what’s working and what’s not. Debt crisis can happen, for instance with the European Union debt crisis which began at the end of 2009 and saw several EU states unable to repay their government debt or bail out in debt financial institutions. As a result, the European Central Bank and the International Monetary Fund had to bail them out. But could crypto and decentralised finance have helped?
The State of Debt in the Economy
One of the most important things within economies is capital markets. Capital markets are how resources are sent to companies so they can use those resources to create new jobs and business opportunities. These capital markets consist of equity, which could be venture capital or company shares purchased. It can also be debt, which includes bank loans, bonds, or convertible bonds.
Debt markets are generally larger than equity markets and what’s been seen in the last 10 years is that debt is being used as a tool to prop up vanity metrics, like stock prices. Furthermore, over the last 12-18 months, certainly since Covid, debt is being used by the Federal Reserve Bank, global central banks, and governments to stimulate their economies.
Where debt is being used unproductively, however, is with zombie companies, those that are riddled by debt with any profit going toward paying off the interest on the debt. Instead of these companies being acquired, which would enable the resources to be allocated elsewhere, zombie companies are being propped up, instead of that money being used for creating jobs.
How Do FinTech and DeFi Differ?
DeFi and FinTech are difference because DeFi operates on an entirely different layer of infrastructure. If you look at FinTech today, you could divide it between payments processing, which is built on top of existing banking infrastructure with some machine learning deciding who is able to take out a loan.
With DeFi, though, it’s built on a new layer of infrastructure. This makes it easy to conduct business globally and lowers the cost of running a financial system. DeFi brings access to capital markets that span the globe rather than the network. The added benefit of smart contracts means that a large group of people taking part don’t have to trust each other to ensure something gets done. One of the exciting elements of DeFi is that you can have a small team of people coding a product that can do billions of dollars of economic value and transfers over the course of a 24-hour period.
We hope you enjoy the Story of Money by YAP Cast.
The ninth episode launched here.
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