Tokenizing loan contracts for a P2P lending platform

Tibeau Schodts
Nov 2 · 4 min read

As an intern at TheLedger I built a proof of concept to test peer-to-peer (P2P) flexible lending using Ethereum’s ERC20 and ERC721 tokens.

💥 Let’s cover some basics first!

What is a P2P lending platform?

P2P lending is basically lending to and borrowing from others through an online service. Instead of getting a loan at a bank, you submit a loan request to an online service. This service will match your loan request to offers from lenders.

Since peer-to-peer lending companies generally operate online, their operating costs are lower than traditional financial institutions. As a result, lenders can earn higher returns, while borrowers can borrow money at lower interest rates, even after the online service has taken a fee.

What does tokenizing actually mean?

Tokenizing is a form of digitalizing items like loans, shares, houses, cars… Pretty much anything can be tokenized. When an item is tokenized all core information of this item is digitalized and registered to a Blockchain.

There are two distinct types of tokens on a Blockchain: fungible tokens and non-fungible tokens (NFT). Fungible tokens can be cryptocurrencies like Bitcoin and Ether, a share of a company... Non-fungible tokens, however, are unique. Below you can find a chart describing the features of each type of token.

Based on 0xcert’s Medium post (https://bit.do/0xcert-medium-post)

💸 The P2P lending platform

As my internship project I built a P2P lending platform using Ethereum to create real contract ownership.

There are already some P2P lending platforms like Fast Invest and Mintos, but they don’t use Blockchain technology. Their users trust them with their credit history, debt, investments, and matchmaking.

Solutions using Blockchain technology like SALT and Nexo offer loans with cryptocurrency collateral. These projects are a step in the right direction as fees are lower than traditional P2P lending platforms. Users don’t have to trust the company, they can trust the technology, the network, and the code. But their users are mostly crypto enthusiasts and programmers. The platforms are too complicated for the average Joe.

Before creating the proof of concept, I wanted to know how we could combine the best of both worlds. So, I decided to use Blockchain in the background for near-instant transactions using an ERC20 token and have the UI as simple as possible.

Providing a real peer-to-peer platform is our main goal, human-to-human interaction should be at the core of the platform. Users can discover new loan requests and manually create an offer for a loan request. They can even chat with each other to define the contract details.

💡 Why tokenize loan contracts?

We tokenized loan contracts so users can easily create, manage, and trade their contracts without a controlling central party.

The creation of a tokenized loan contract happens when an offer for a loan request gets approved by both parties. When this happens all critical information regarding the loan contract gets stored in an ERC721 token. The investor becomes the owner of this token and sends the funds to the borrower.

Every transaction regarding the loan gets added to the token. This way the token represents the contract details and the state of the installment. The first transaction that is added to the token is the transfer of the funds from the investor to the borrower.

The borrower must pay the installments to the owner of the token. When a contract owner wants to step out of a contract, he or she can trade this contract on a secondary market just like trading a CryptoKitty or transferring a cryptocurrency like Bitcoin. The only fee the owner has to pay is the transaction fee for the network.

Even though the owner trades his contract, nothing changes for the borrower.

With the rise of non-fungible tokens, we will also see the rise of marketplaces to trade them. The contract owner could use an existing marketplace like OpenSea or Rare Bits to list the contract for sale. However, in the future we expect that there will be a need for specific marketplaces.

Thanks to the tokenized loan contract all parties involved in the loan will save time and money. Investors can easily trade ownership of the loan contract and trade them on secondary markets. The borrower must pay his debt to the loan contract token.

Thanks to Kevin Leyssens

Tibeau Schodts

Written by

Software Developer @ Wolters Kluwer. Business Owner @ Repage. Located in Belgium.

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