P2P Lending Reinvented: Blockchain’s Impact
While there are plenty of new and promising technologies emerging in the financial service sector every year, blockchain is undoubtedly the one with the most potential. Distributed ledger technology can make local and global transactions a lot quicker, safer, and cheaper. Those same benefits can be easily applied to the peer-to-peer (P2P) lending market, essentially leveling both investors and borrowers alike.
The P2P Market: Where Does it Stand?
The concept behind P2P lending is as basic as it gets — one party lends money or assets to another party. Whether or not interest is involved is entirely up to the contracting parties, though the overwhelming majority of deals do include interest.
Peer-to-peer lending used to be known as social lending and its history dates back to the 1700s. It reached its peak throughout the 18th and 19th centuries, eventually becoming the most widely used method of lending in Europe.
As new technologies and techniques began emerging, however, the market started to diversify and evolve, but the popularity of P2P lending never went away. The very first digital P2P lending platform was launched back in 2005 and by now, 13 years later, the platform has managed to lend more than GBP2.8 billion to UK consumers.
According to the popular forecasting website Statista, the P2P lending market will be worth $1 trillion by 2025, outlining its importance for users.
Issues With the P2P Lending Market
At its core, the P2P lending market requires one very simple, but elusive, component to function — trust. Over time, as the market and the world got more complicated, that simple trust between parties began to break down.
This is where intermediaries come in. They provide an additional (and indeed effective) layer of protection, safeguarding parties from fraud and other nefarious intentions. In return for this security, though, they also demand high fees, regulation, and other counterproductive complications.
It is all thanks to these expensive, intrusive third-parties that the peer-to-peer lending market became a far cry from what was intended to be.
Blockchain technology answers the question of how to create trust and security without any of the traditional downsides described above. At its core, distributed ledger technology is a trustless and decentralized environment where intermediaries are not only redundant but entirely unnecessary.
A distributed and immutable ledger allows for the transfer of asset ownership from one person to another without the need for a third party, which means that finally the ease and efficiency of P2P lending practices can be revived as they were originally intended.
The benefits are significant, especially for small-to-medium-enterprises and individuals, because as it stands, access to credit can be difficult and complicated.
Blockchain technology also provides a number of important advantages, including:
- Low transaction fees
Cryptocurrency transactions have minimal or no transaction fees at all, which is far more convenient than the fees on credit card transactions.
- Increased accessibility
According to McKinsey research, there are over 2 billion unbanked and underbanked people throughout the world, and without access to any form of credit. Blockchain allows anyone with access to internet to easily receive P2P loans effectively.
Transacting on the blockchain is particularly fast with most of the operations happening instantly or in a few short minutes.
P2P lending provides many benefits to the end user as compared to traditional institutional lending. However, the issues which are currently affecting it are making it a lot less convenient than it can and should be. Blockchain technology can effectively meet all of these problems, transforming the market and offering billions greater, more secure access to credit.
As disruptive as it is, blockchain is still a relatively new technology. Perhaps the best example of this is Ethereum, the number one platform in terms of developers and apps, is unable to handle more than 20 transactions per second. This scalability issue is a huge roadblock for mass adoption.
Unfortunately, the majority of the existing solutions are unable to scale up to the challenge that real-world applications demand. The P2P lending market is an incredibly intensive one, and if blockchain technologies are to transform it, the scalability issue is amongst the first hurdle to overcome.
Fortunately, there is a solution. AERUM’s blockchain is a brand new, cutting edge platform that solves all of these issues. Not only is it blazing fast, but it manages to deliver something that other competitors are still struggling with — on-demand scalability.
This means that parties will be able to adjust the throughput of the network based on what’s currently needed. AERUM’s network can effectively handle from 500 to 100,000+ transactions per second. It’s also very easy to implement with existing platforms, because it is fully compatible with Ethereum. This end-to-end Ethereum integration is also what ensures secure and easy transfers thanks to cross-chain atomic swaps.
What do you think of blockchain technology reviving the P2P lending industry? Don’t hesitate to let us know in the comments below!