Can DeFi save private lending?

Author: Prathik Desai Source: tokendispatch Translation: Shan Ouba, Jinse Finance

In 1719, Scottish gambler and monetary theorist John Law persuaded the French Regent to allow him to build a system to package highly illiquid colonial assets into negotiable paper instruments. He founded the Mississippi Company, monopolizing trade with French Louisiana, a vast territory mostly swampy.

Law packaged these illiquid colonial interests into gold-convertible company stocks. Ordinary Parisians flocked to them. A year later, this scheme made him the richest man in Europe and appointed him as the French Finance Minister. However, this was only temporary.

What happens when you hold gold-convertible stocks? You wait for the price to rise and then demand your gold back. That's exactly what investors did. A redemption frenzy began; they wanted their gold back.

However, gold was simply not enough. Law's solution was to change the rules. He limited the amount of gold each person could hold, decreed the devaluation of securities, and mandated that stocks could only be sold through his bank at prices he set. Each intervention bought him only a few more weeks, but utterly destroyed trust. By 1720, investors' equity certificates had become worthless. After dragging France into the Mississippi Bubble, Law fled the country in panic.

Chaos ensued on Rue Campanile in Paris during the Mississippi Bubble of 1720

Three centuries later, the world's top private lending funds have reacted in almost identical ways to a surge in investor redemptions: they have modified their redemption rules to control losses. But is this truly a solution, or just a band-aid? Can on-chain private lending help? In today's in-depth analysis, I will explore this question. Let's begin.