Pawnshop Ledger

All lending institutions in the world are doing one of two things: either verifying your identity or seizing your property.

Written by: Thejaswini M A

Compiled by: Block unicorn

All lending institutions in the world are doing one of two things: either verifying your identity or seizing your property.

The first task is vast in scale and costly. It establishes credit bureaus, credit scoring companies, underwriting departments, collection agencies, and courts that enforce judgments. The consequences of default can follow you for years. The existence of trillions of dollars in infrastructure is to allow banks to lend money to strangers while having a rough idea of whether that money can be recovered.

The second task requires a set of scales, and that’s it.

Securities lenders, or margin settlement agents, are responsible for pricing the underlying assets and then sleeping soundly. This is the oldest form of lending and it works perfectly. It has never grown large because a system that requires one to own something before borrowing something primarily serves those who do not need it.

Cryptocurrency lending plays a second important role in lending, which is security. When people think of cryptocurrency, they often panic, first recalling negative events like the Sam Bankman-Fried incident. Therefore, opting for a safer lending method is a good thing for us.

In the cryptocurrency space, to borrow a thousand dollars, you first need to have fifteen hundred dollars.

This product is only available to those who already have funds. It is very effective for traders who want to leverage without selling their positions, and it is a legitimate business in itself. As for others, our proposal is to prove that you do not need it, and then we will give it to you. That seems fair.

In the traditional financial system, credit drives economic growth. Banks lend money to bakers based on their future ability to sell bread to buy ovens. Banks trust borrowers, thereby creating new economic value. This model works because those who need loans are, by definition, those who are short on funds.

Today, I want to show you who is trying to work on the first chain and what their ultimate fate is.

In the United States, the cryptocurrency market is worth up to $5.14 trillion. Meanwhile, the cryptocurrency market is almost worth nothing. There are not many factors hindering the development of cryptocurrency:

Identity. Unfortunately, wallets are not people. I can now create ten thousand wallets just by paying gas fees. If lending institutions cannot determine whether the address coming to collect today is the same as the borrower who defaulted last year, then the credit system built on trust will collapse on the first day someone tries to attack it.

Pricing. Even if the identity verification issue is resolved, lenders need a way to charge different interest rates to different borrowers: some borrowers pay 9%, while others pay 29%. This requires historical records, which in turn requires the involvement of credit agencies. On-chain data can show a wallet's activities in DeFi, but you cannot know if this person has kept their job or if they have repaid previous loans on time.

Recourse. Normally, when a borrower stops repaying, a series of consequences follow. Collection calls come in, default records are entered into credit files, and courts can even garnish wages. But if a wallet stops repaying, what can you do? Abandoning a wallet has no cost. Creditors do not know your name, your address, and have nothing to seize.

The fourth point is legal. Every enforcement mechanism I just listed requires a license. Collection agencies must have a license to operate and comply with federal regulations, including collection frequency and content. The interest rates charged by lending institutions are also subject to usury limits, which vary by state and product. Consumer credit is one of the most regulated activities in finance, and any unlicensed operation of such business is illegal.

Let’s see where this will push everyone. We will all eventually head to the grave.

Goldfinch was founded in 2021 with support from a16z and Coinbase Ventures, completely skipping on-chain identity verification. They provide loans to real businesses in these markets through specialized underwriters who understand emerging markets, allowing cryptocurrency to provide the funding. Goldfinch has motorcycle taxi financing institutions in Kenya and lending institutions in Nigeria and Southeast Asia, with borrowers spread across 18 countries.

In October 2021, Tugende Kenya received a $5 million loan to expand its motorcycle financing business for taxi drivers. Goldfinch later discovered that $1.9 million was transferred to Tugende's troubled Ugandan parent company, which was not allowed under the loan terms. Tugende defaulted in June 2023.

Another borrower, Stratos, defaulted on a $7 million credit line, while a third borrower, Lend East, defaulted on nearly $6 million. In total, the agreement watched over $18 million in funds disappear into the real-world risks they originally aimed to solve. After issuing about $100 million in funds, Goldfinch ceased operations in June of this year. Its token price dropped by 99.8%.

Upon reflection, these failure cases are all ordinary credit failures. Rising oil prices made it impossible for drivers to pay, contracts were breached, and borrowers transferred funds they should not have. The blockchain works well; it just cannot predict whether these funds can be recovered.

Maple is a more enlightening case because it is the largest unsecured cryptocurrency lending platform ever, and it has not perished. But to survive, it had to completely abandon its original mission. It realized that in the cryptocurrency space, the risks of unsecured loans based on trust and identity are too high.

On December 5, 2022, Orthogonal Trading defaulted on eight loans totaling $36 million. This accounted for about 30% of all active loans in the agreement. Orthogonal had informed its underwriters before November that its risk exposure on FTX was about $2.5 million. On December 3, the company admitted that the actual amount was far higher. This deception immediately led to 80% of the funds in the largest risk exposure pool (M11 USDC pool, about $31 million) becoming worthless, and Maple acknowledged that they might only recover $2.5 million of the total $36 million.

Sid Powell later stated that under-collateralized loans require stricter due diligence, and Maple may turn to partial collateralization.

It has been moving forward rapidly. Today, Maple's loan collateralization rate exceeds 140%, and there have been no losses since 2023, resulting in deposits growing by over $2.2 billion. This more prudent choice has proven effective.

This raises the question of who is trying now, as many are attempting, and they have clearly categorized themselves according to the obstacles to attack.

Divine Research is dedicated to combating identity blocking. Since December 2024, the company has issued about 30,000 loans, most of which are under $1,000 in USD, with borrowers including teachers, fruit vendors, and anyone who can access the internet. Borrowers must verify their identity through World ID iris scans, preventing someone from opening a second account after abandoning the first. The loan interest rate ranges from 20% to 30%. According to the Financial Times, the default rate for the first loans is about 40%.

3Jane focuses on price blocking. It obtains borrowers' banking data through Plaid and uses Credit Karma's VantageScore rating, then packages both in zero-knowledge proofs to ensure that all sensitive information is not transmitted on-chain. Ultimately, they issue credit limits based on the results. Paradigm led its seed round financing. 3Jane currently holds about $62 million in funds, making it the largest on-chain unsecured lending institution today.

Wildcat is a recourse company that does not conduct any underwriting. It publishes a loan master agreement template, and once the borrower and lender sign it, Wildcat no longer intervenes. Its own documents state that the company does not assess the creditworthiness of borrowers and must not intervene in market operations once the loan business starts.

Huma has taken a different development path, completely halting lending to individuals. Huma Finance is considered the first PayFi network. They have partnered with Qiro Finance, which acts as Huma's strategic underwriting and risk monitoring partner in the PayFi network.

Huma provides financing services for invoices and cross-border payment flows, where known institutions owe known amounts on known dates. The company has facilitated $2.3 billion in transactions this way.

None of these schemes will enforce any terms on-chain. Divine will exclude you from the future, which is the weakest sanction among all schemes, and its 40% default rate indicates that borrowers have anticipated the consequences of such sanctions. 3Jane will hand the documents over to a U.S. collection agency, and this practice is effective because its borrowers are U.S. citizens with legal identities and credit records, and defaulting would harm those records. Wildcat resorts directly to the courts.

Without over-collateralization to seize, all viable mechanisms are forced to revert to the old system. When problems arise, in most cases, it is the lawyers' involvement that leads to consequences.

Note where those successful cases have turned. 3Jane's website now describes it as a credit guarantee yield coin for fintech initiators, offering warehouse limits from $5 million to $200 million. It purchased $8.5 million in small business receivables from a company called Slope. Huma provides financing for B2B payment processes. If payment defaults occur, Huma relies on real-world factoring agreements and sends lawyers to enforce contracts. Both agreements have turned to institutional lending because institutional lending can anchor debt in the traditional system, with signed agreements and corresponding jurisdictions.

Thus, the next attempt in the market is source withholding.

If your salary goes directly on-chain, lenders can receive repayment before you get the money. This is the first mechanism in the cryptocurrency space that directly interacts with consumer funds. The infrastructure went live this year. Deel processes $22 billion in salaries and began providing stablecoin salary payment services for about 40,000 businesses in the UK and EU through MoonPay in March of this year. Rise has natively supported stablecoin salary payments for years. Toku has partnered with Aleo and Paxos to build a private version for companies that cannot publicly disclose salaries on public chains. Since these companies officially use stablecoins to pay salaries, the infrastructure for