An Insight into Peer-to-Peer (P2P) Lending
August 23 2021 - 9:00AM
NEWSBTC
Peer-to-peer lending, also known as P2P lending, crowdlending, or
social lending, allows borrowers to connect directly with lenders,
bypassing the middleman normally involved when utilizing
traditional banking systems. In a P2P lending scenario, lenders are
typically referred to as “investors,” who loan money to qualified
applicants. The intermediary website (P2P platform) usually sets
the rates and the term for the lending agreement, and once the
terms are agreed by both parties, the transaction will be
facilitated. To better understand P2P lending, it’s important to
have a firm grasp of the traditional banking model. Typically, if
you want to take out a loan, you must fill out a loan application
and submit it to the bank. The bank will then assess your
creditworthiness and any other factors they deem relevant before
deciding on whether or not they will grant you the loan and the
terms you will be offered. Once terms have been agreed, the bank
will then source the capital from either the central bank or from
the savings deposits of their other banking customers. There are a
few challenges involved with this method: Banks generally operate
with a strict risk management strategy, which automatically
disqualifies those with poor credit or a lack of credit history.
Banks usually offer poor rates and often apply fees to the total
loan value, which increases the price of repayments. The
traditional banking system can be slow due to a lack of innovation
and failure to adopt new technology. Traditional P2P Lending
Traditional P2P lending occurs when fiat currency such as USD, GBP,
or YEN exchanges between two parties outside the conventional
banking system. In these instances, peer-to-peer lending websites
such as Prosper, Lending Club, Peerform offer multiple loans and
have competitive interest rates and low fees. These P2P platforms
usually highlight their borrower qualifications upfront to save
time during the application process. Cryptocurrency P2P Lending In
recent years, the P2P lending market has continued to evolve with
the introduction of cryptocurrency, in particular, the Ethereum
blockchain. Now, P2P lenders can utilize decentralized networks and
smart contracts to open up new possibilities for accessing
financial services outside of traditional banking infrastructure.
This is what is commonly referred to as DeFi (decentralized
finance). Thanks to blockchain technology, borrowers and lenders
may engage in a loan arrangement without the necessity for a
middleman. With the use of this tech, smart contracts automatically
self-execute per the loan terms, which enables trustless
transactions between both parties. At the time of writing, DeFi
Pulse currently states that the Total Value Locked (TVL) in the
DeFi lending market is just over $83 billion. Just like traditional
P2P loans, loans that occur on the blockchain still require
collateral, usually deposited in either fiat or digital currencies.
In most cases, the collateral is held on an intermediary website or
crypto P2P platform, where it will be held in a smart contract in
accordance with the terms stipulated in the agreement. The maximum
quantity an individual can borrow is decided by the value of the
collateral given. This is typically known as the collateral factor
or collateral ratio. This system is implemented due to the fact
that there is no creditworthiness evaluation or past history to
consider because the lender generally does not reveal their
identity. On the other side of the transaction, lenders earn
interest from borrowers, which is usually set at a pre-agreed rate.
In some cases, crypto P2P platforms offer incentives and other
bonuses to lenders in order to attract more volume to their
platform so that their lending ecosystem can function adequately.
Some of the most popular crypto-based P2P lending projects include:
Aave Compound MakerDAO These decentralized platforms make lending
available to anyone with access to the internet and sufficient
funds to put down as collateral. These services are open 24 hours a
day, seven days per week, and operate much more efficiently than
traditional banking services, which is one of the reasons for the
massive surge in popularity over the past couple of years.
Furthermore, there is no need for any KYC process, which means that
lenders and borrowers can interact anonymously, which would have
been thought impossible in the not-so-distant past. With that said,
one of the main criticisms of crypto P2P lending is the steep
learning curve associated with the process, especially for those
that are unfamiliar with the fundamentals of cryptocurrency
transactions. The UX of most major platforms is relatively clunky,
and there is still an element of uncertainty towards the safety and
security of these platforms. Unfortunately, many of the major
lending platforms have experienced hacks and exploits in some
respect, which has caused both lenders and borrowers to lose funds
and suffer financial losses. As the industry continues to mature
and find new ways to iron out these kinks, it’s likely that crypto
P2P lending platforms will begin to play a larger role in our
collective financial future, which should pave the way for a more
simple, accessible, and cost-effective form of lending. About the
Author: Michael is the General Manager at Invezz.com, overseeing
the brands’ strategy and growth. He has led start-ups, comparison
brands and marketing strategies in a variety of industries for over
10 years. He is the co-founder of Kinetic Investments and his
experience spans investing, cryptocurrency, product marketing and
business operations. Michael is keen on all things decentralised,
cares deeply about the planet, and supports initiatives that lead
to a fairer society. In his own words, his spare time is occupied
by trading, travelling, and charitable projects. Image
by Tumisu from Pixabay
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