Peer to Peer Lending in Crypto

Let’s face it! There are quite a lot of advantages that come with using the blockchain technology. First of all, it makes the financial aspect of the digital economy more accessible to the masses, and it adds a new level of transparency and security to financial transactions that weren’t possible before. If just three of the main cryptocurrencies were to merge into a single investment vehicle, then that would herald a new and more exciting era in the crypto movement.

If you’re not convinced about the benefits of P2P lending in cryptocurrency, consider the following points:

A Brief History of P2P Lending

Social lending, known today as peer-to-peer lending, initially started around the 1700s or so. If you’ve ever read or heard of the book “Gulliver’s Travels” then you know about its author Jonathan Swift, but what you may not know about Swift is that he created the Irish Loan Fund, which is Ireland’s most popular lending platform. Swift acknowledged that even though rural folks weren’t clued up about credit and had little to no collateral, they could be creditworthy, which is why he took the risk and started lending them small amounts of money at zero interest.

From then on, peer-to-peer lending became one of Europe’s most popular and commonly used lending methods, especially during the 18th and 19th centuries. Ireland had 300 lending programs by the end of the 18th century, all of which specialized in short-term loans of very small amounts. However, thanks to the rise of the banking industry in the 20th century, peer-to-peer lending almost became obsolete.

However, this is not to say that peer-to-peer lending is dead. For example, a Bangladeshi economist, banker, civil society leader and social entrepreneur named Dr. Mohammad Yunus founded peer-to-peer lending with a modern twist in his home country of Bangladesh. His bank, Grameed Bank, pioneered the concepts of microfinance and microcredit, and his efforts even earned him a Nobel Peace Prize. Dr. Yunus’ objective was to assist underprivileged entrepreneurs who would not normally have access to traditional bank loans. At the time of writing, Dr. Yunus’ Grameed bank had managed to help over 8 million borrowers, 97% of which were female entrepreneurs.

However, it was not until 2005 that the first online P2P lending program was launched, and so far, this program has managed to loan out £2.8 billion to UK patrons. It’s important to note here that online P2P lending follows a very similar track to that which was pursued by both Swift and Yunus, with the only difference being that online lending made it possible for this service of microlending to be available in a developed country. The benefits of P2P lending, therefore, go beyond just helping people without access to banking facilities access finance, but is rather a movement to offer all types of borrowers with a more reasonable alternative to the high-interest charged by traditional lending institutions.

Also, peer-to-peer lending became even more popular when Lehman Brothers went bankrupt in 2008 because consumers were no longer able to trust traditional lending institutions anymore, which made the accessible interest rates charged by P2P platforms a very attractive alternative. Within just 5 years since the financial crisis, P2P went from being a slightly widespread movement to a generally accepted mainstream option.

The best part about P2P lending is that it benefits both the borrowers and the lenders. Borrowers get access to reasonable lending rates- even those with a spoiled credit history- while P2P lenders get a better return on their investment than they would if they were to place their money into a traditional savings account, and they also get to benefit from tax relief. For instance, investors at Fast Invest typically see returns of 8% to 13% each year, and the P2P lending system gives both lenders and borrowers a better level of transparency.

Although P2P lending can be classified as a groundbreaking method for saving, borrowing and investing funds, it is about to face significant disruption in the form of cryptocurrency providers. Cryptocurrency enthusiasts claim that the introduction of blockchain technology could seriously benefit the practice of direct lending, and it is further speculated that using Bitcoin or Ether for P2P lending will increase the level of scalability, transparency, efficiency, and cost-effectiveness of this practice.

The most obvious and noteworthy benefit of crypto-powered P2P lending is loan tokenization. Traditionally, the lending industry operates on the exchange of debt forms, which is not yet an option for P2P loan investors. That said, tokenization could be possible with blockchain, as investors will be able to exchange their loans with other participants within their P2P network to make the market more liquid. P2P lending and blockchain technology look like a match made in heaven, and it is not far-fetched to think that new products, services, and partnerships based on these two industries will be introduced to the fintech industry soon.

What Are P2P Lending Marketplaces?

Thanks to P2P lending, consumers now have a reliable alternative to the traditional banking system, (whose loans often come with ridiculous terms), while giving investors a more profitable investment platform. In addition to enjoying lower interest rates, consumers also get to improve their loan approval rate while experiencing less bureaucracy. On the other hand, investors get more bang for their buck and lower market volatility, so it is a win-win for everyone involved.

So, since the crypto industry is about to bring another revolution to the fintech space, P2P lending is also on the brink of getting a significant facelift. At the moment, we too are holding an Initial Coin Offering aka ICO, with the purpose of raising funds to be used for the infrastructural development of our platform so that we can offer a wide array of new crypto products and services. In fact, even Wall Street is starting to acknowledge the potentially positive transformation that blockchain technology will bring to the fintech industry.

That said, before we delve deeper into the revolutionary track record and potential of P2P lending, let’s get into what P2P lending marketplaces are and what their function is.

Peer to peer lending marketplaces is online-based marketplaces that bring together borrowers and investors aka lenders. What makes these platforms different from banks is the fact that they don’t necessarily loan or hold funds, but rather serve as a middleman to connect the borrowers and lenders while making sure that the whole process goes smoothly. So, how to P2P providers remain sustainable? They charge a minimal fee for their services and also get a commission from both the lenders and borrowers. However, these platforms provide a lot of value in the form of shorter decision cycles, less bureaucracy, faster loan approval, and issuance, as well as significantly lower interest rates when compared to traditional lending institutions like banks. However, the level of returns offered by P2P providers to lender differs according to factors like borrower profile and loan type. Lenders on the Fast Invest platform typically get returns of about 8% to 13%.

What Are Cryptocurrencies and Why Are They Important?

Since cryptocurrencies are continuing to rise in popularity, it’s probably a good idea that we start with the basics here. Most people know that cryptocurrencies are virtual currencies, tokens or digital form of the money-whichever term you’re most comfortable with. Cryptocurrencies are very different from what we know as normal currency, like the USD, British Pound, and Euros, etc. For one, you can only use digital currencies online because they do not come in physical form, and cryptocurrencies are not under the control of any government or central bank.

Instead, cryptocurrencies are structured under the blockchain system, which is a collective and distributed ledger that keeps track of every transaction, contract and agreement that goes on within the network. Blockchain transactions are irrevocable and completely transparent, which makes it an even more reliable form of exchange than what we’re used to. Utilizing tokens comes with a plethora of advantages including:

• Low transaction fees — Cryptocurrency fees are incredibly low (and sometimes nonexistent) when compared to those charged on normal credit card transactions.
• You own it — Saving your money at a bank makes you vulnerable because those institutions can limit your access or freeze your funds at any time. Digital currencies, on the other hand, are controlled by private and public keys, which enable you to control access to your funds at all times.
• Accessibility — There are currently thousands of people around the world who do not use banks, whereas the internet is widely available, which makes it easy to send and receive payments via the digital currency.
• It’s really fast — Wiring funds across seas can take anything from 3 business days to a week, whereas cheques can take even longer. Cryptocurrency transactions are immediate, with the most complicated transactions taking only 10 to 20 minutes at the most.
• Your identity is protected — If you’ve ever done online shopping, then you know that at the end of each transaction you’re required to provide sensitive information such as your credit card number, its expiration date as well as the CSV number, a practice which is very risky. Transacting with digital money does not require any of that, and the only information you need to send the vendor you’re buying from is the amount you’re paying, and you’re done!

What Do Crypto Assets Bring to the P2P Market?

Blockchain technology has shaken things up in the fintech industry. Although seemingly invisible, blockchain technology is changing the way in which we transact and interact online. In fact, this technology is changing the way in which P2P lending, banking, and even insurance are done, and some consider it to be an answer to the question of how we can make online interactions more reliable.

Equality on a Global Scale

It doesn’t make sense why poor people in disadvantaged countries are expected to pay triple the amount of interest required from privileged consumers in developed countries. Truthfully, it’s quite unfair, but it will continue to be so as long as centralized public institutions control the flow of money. Blockchain technology that’s utilized through global decentralized P2P programs is the most viable alternative, as it offers equal terms to all, regardless of inflation or nationality.

Plus, crypto lending offers P2P investors access to a global market. In effect, they can lend to anyone, anywhere, which significantly decreases the systemic risk attached to the ebb and flow of local economic conditions, and thanks to the lack of overheads and low operational costs associated with crypto lending platforms, investors get to enjoy even higher returns.

No One’s Left Behind

According to research done by McKinsey, about 2 billion people around the world today remain either unbanked or underbanked, which translates to roughly 39% of the world’s population without a bank account. As previously mentioned, blockchain-based P2P lending gives consumers that don’t have a credit history or bank account access to loans and opens the economy up to them. Tthat would be impossible under the current banking system.

What Are the Risks of Crypto-Proved Lending?

P2P crypto is not without risk, but there are some measures that you can take to minimize them. There are a few things that you should look out for specifically, based on whether you’re using a crypto-approved lending model or lending in cryptocurrencies.

• Platform Security — Perform a background check on your chosen platform to make sure that it hasn’t experienced a breach of security, and if so, how it has dealt with such incidents. Unfortunately, cryptocurrency websites are often targeted by hackers, so it’s a good idea to choose a provider that has significantly thorough and stringent security policies and measures.
• Market Volatility — Market fluctuations can cost you dearly when the time comes for you to convert fiat to cryptocurrency and vice versa at any point during the loan transaction. Investors that are lending through crypto-based platforms can experience depreciated value on their assets due to the volatile nature of the market, to the point where it’s better for the borrower to default instead of repaying the loan amount.

Conclusion

Cryptocurrencies are an incredibly transparent alternative to the traditional fiat currencies that we’re used to, and it’s an alternative that improves the society. Like anything that represents a change in society, it will have to go through a significant amount of resistance before it can be widely accepted and used. However, thanks to the efficiency and secure technology provided by blockchain, borrowing, lending and saving money will become infinitely more efficient and transparent.