This is the fifth part in a five part series of posts that lay out the basics of what we are trying to build with Catallax. The series will follow the following schedule and I’ll update the list with links as the articles go live:
Demurrage, Catch Up, and Pref Dividends
Passthroughs, Legacy, and Folding the Blockchain
Privacy, Accounts, and Transparency
Voluntary Organization and Citizen Override
Loans and a new kind of Capitalist (today)
One way to offload the responsibility of paying a decay fee is to loan your cash to someone else so that they pay the fee instead. Loans under the Catallax system have some important properties that are important to discuss and that make apparent the power of this new economic system.
When a loan is made in the Catallax system it is done via a particular kind of loan smart contract. This contract has the unique ability to remove prefs from circulation when a borrower pays cash back to a lender. This is important because we don’t want symbiotic small circles forming in our economic ecosystems.
Lenders will lend a borrower cash and in return get prefs in that borrower's account. They hold onto these prefs (as well as the loan amount) until payments start coming back the other way. When a borrower pays back some of the loan the prefs will be removed from the lender’s ledger. During the length of the loan the lender will benefit not only from the interest charged but from the pref payments coming from the borrower. If the borrower is using the the cash for building a business it may become prudent for the lender to forgive the loan balance to maintain a pref balance with the borrower.
This turns lenders into a new kind pseudo banker/venture capitalist. We believe that a large number of balances will be forgiven and that this will form a new, more personal, relationship between bankers and borrowers. Bankers now can find a long term benefit by helping their clients become more profitable and driving revenue to their accounts.
Another effect this should have is driving interest rates to very low levels. When people are wanting to loan out cash instead of having it decay the amount of capital available should increase and form a very competitive market for rates.
If this is interesting to you and you'd like to see where we are going with Catallax, please pick up my book Immortality (Purchase of a physical or kindle copy helps support this project).
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