Zero Fees and Interest-free Loans in Decentralized Credit Networks

Blockchain technology is moving very fast and transforming a lot of industries. Decentralization is regarded as an effective way to increase the transparency of transactions and make them simpler in many fields. In particular, the application of decentralization has shown a great potential in finance. Blockchain can disrupt the traditional banking industry, enabling new business models, and making the traditional financial infrastructure more efficient. Some people even think that blockchain technology can replace traditional banking with coming decentralized financial system, where users will be able to take advantage of censorship-resistant financial services, store and transfer their assets and money, take out loans without the need of intermediate central authority, and have a full control of their wealth and personal data.

A lot of this new infrastructure is currently being built, radically changing the way people do business and spend their money. Decentralized financial networks are based on smart contracts and peer-to-peer (P2P) services which replace banks as a trusted party. They can give their users access to complex financial tools for creating and protecting their assets and managing risks. Such systems have the potential to fully reshape the financial world by providing real-time transactions, ubiquity, and fairness.

One of the fields in finance that has shown a great potential for decentralization is money lending which is the core principle of any functioning economy. Decentralized lending based on blockchain has become possible only in the last 5 years. Decentralized credit networks which have recently seen a rapid increase of popularity promise easy and global access to credit and loans for business and the public by immediately connecting borrowers and lenders on the platform. Users of decentralized IOU credit networks can even take advantage of interest-free loans and zero fees.

What Is Decentralized Lending?

Peer-to-peer lending is not a new concept. This is the way how loans and subsequent payments were handled in the past before the rise of banks. This system was based on interpersonal trust but over time, P2P lending was replaced by traditional bank loans where banks act as intermediaries and provide an extra layer of protection. Unfortunately, that protection comes with high fees, the complexity of regulations of lending and borrowing, and slow processing time.

After the global financial crisis 2008–2009 which as largely caused by toxic pools of debt artificially created by banks, the chaos and fragility of the system aroused dissatisfaction with commercial banks among regulators and businesses that resulted in an attempt to create a more transparent financial system. New laws and regulations were introduced to improve transparency and to democratize the funding process. They opened the door to new lending institutions many of which operate on the popular peer-to-peer model which is free of bank bureaucracy. The result was the rise of peer-to-peer (P2P) platforms which directly connect investors with borrowers and are a new type of “sharing economy”.

P2P platforms remove the middleman from the process and use technology to determine creditworthiness and other factors related to borrower’s ability to properly pay back a debt. They offer more transparency, simplified procedures, and better interest rates deal for both a borrower and a lender. The P2P model has proven to be successful and according to Statista, the global peer-to-peer lending market is expected to reach $1 trillion in the near future.

Advantages and Challenges of Blockchain-based Decentralized Credit Networks

Bankers may tell you that the traditional financial system is global and efficient, moving trillions of dollars a day and serving billions of people. In fact, bank loans can give businesses access to capital which boosts economic growth. But the modern financial system is rife with problems which open opportunities for fraud and crime and add costs which consumers ultimately have to pay.

Why is the traditional financial system so inefficient? It is based on ineffective industrial technologies and paper processes. Being centralized, it is resistant to change and vulnerable to malware attacks and system failures. And it’s exclusionary so billions of people are denied access to basic financial tools. Today’s financial system operates through a limited number of powerful intermediaries who make money by providing services that can be easily delegated to software.

Enter Blockchain

Blockchain technology is a real game changer for the financial industry. Blockchain is built on a distributed ledger that runs on millions of devices so it is decentralized by design. It makes possible to transfer ownership of money, bonds, equities, and virtually all other kinds of assets from one person to another securely, privately, without the need for an intermediary because the trust is established not by governments and banks but by network consensus protocols, cryptography, code, and collaboration. 
The key features of blockchain-based financial services which make them superior to their centralized counterparts are:

  • Permissionless: Any person can access decentralized financial networks using the internet and no one can be denied service based on who they are, where they live, and what their income level is.
  • Trustless: People don’t have to rely on a central party to ensure the validity of transactions.
  • Censorship Resistant: At some later point of time, no central party can deem validated transactions invalid.
  • Programmable: Using plug and play architecture, it is possible to create financial services at a low cost.
  • Transparent: Public blockchains are fully transparent.

Decentralized Lending on Blockchain

Conventional lending is limited to locations where regular banks operate. This model is unfair because now more than 2 billion people who live in poor countries have no access to finance as they often have no official identification and no bank account. Many lending agreements in regular banks are opaque in design with hidden fees and penalty rates.

Decentralized credit networks allow people to get a loan without going to bank and lending is not restricted to local markets. Decentralized lending solutions on blockchain are based on the timeless peer-to-peer model which makes the entire process seamless. They offer a cheaper and more secure way of making personal loans and give people equal access to the global lending market. They provide significant benefits particularly to ordinary consumers and small-to-medium enterprises that often face difficulties with access to credit in regular banks. With a decentralized credit network, everyone can get access to a loan if there is a device with an access to the internet.

There is no middleman. Consumers and businesses can submit a loan request and be connected directly with willing lenders from all over the world who in turn bid to provide a loan. As a result, borrowers can access very competitive financing. Interest rates in decentralized credit networks on blockchain are agreed by participants. People from all countries have the same access to lending and to competitive interest rates.

Smart contracts act as loan agreements and contain data about the parties involved, creditworthiness, capital, collateral, and what happens in the cause of default. With smart contracts which are secure by design, lenders can easily access the counter-party’s trustworthiness and vet the borrowers. Lenders can also validate transactions and perform other routine administrative tasks related to the lending process almost momentarily which reduces costs and accelerates the process.

All information about transactions is open for audits and a credit rating can be assigned to every address. Anyone can see the details about transactions of a specific address and analyze them. If a loan provider notices some suspicious or unusual activity, they can simply withdraw from offering a loan.

Decentralized lending is still in its infancy and only time will tell if it will become a global system that gives all people equal access to a worldwide lending market. There are challenges that can make its widespread adoption difficult. They are related to determining creditworthiness, establishing and verifying identities, know-your-customer (KYC) rules.

Collecting loans made on blockchain may not be easy and will test the legality of smart contracts. It will require the adoption of a regulatory framework on the global level for P2P cross-border lending. Currently, courts are unlikely to recognize the validity of smart contracts in doing business. Although records of transactions are stored on a distributed ledger, there are no procedures for evaluation and management of risks. At this stage, blockchain doesn’t seem to be appropriate for complex financial operations. But that doesn’t stop entrepreneurs from adopting blockchain technology for performing simpler tasks so there are a lot of projects running on blockchain platforms such as SALT, Ripio Credit Network, ETHLend and some of them have the potential to grow.

IOU Credit Networks

In recent years, we have witnessed a growth of IOU credit networks that combine credit and social trust. This model is based on transitive trust or credit between permissionless users. First, users express trust and strategically decide how much credit they are willing to extend to each other. Users who don’t directly trust each other can provide transactions by exchanging IOUs along the chain of trustlines in the network. Today, IOU credit networks serve as a backbone of real-world payment systems of Ripple and Stellar which are also deployed by different banks worldwide.


Ripple is one of the most popular decentralized financial systems as a fast and low-cost method for performing payments in existing fiat currencies, Ripple’s own cryptocurrency — XRP, as well as other cryptocurrencies. It enables people from all over the world to exchange money, goods, and other assets almost in real time — on average, this process takes from 5 to 10 seconds. 
The network maintains the distributed ledger that stores information about all accounts in the system. It creates a credit/debit network that works in a similar way to traditional banking systems. Ripple users can buy goods or deposit their money to another user, for example, a Gateway — an existing bank or an online platform and the system keeps track of the balance for each pair of users. Validation of transactions is carried by Validators — special servers of organizations and individuals.

XRPs were pre-mined by Ripple and can be purchased by users after they open an account within the system. The system collects a small XRP fee for each transaction and destroys it after the transaction is confirmed. XRP payments are straightforward and don’t require any cooperation from users who receive the currency. But users who want to receive IOU payments, must create a trustline with other users and declare the amount of trust towards each of them. Users need to specify the amount of trust for each currency.


Stellar acts as an inexpensive intermediary for international transactions that connects payment systems, banks, and people. This decentralized financial services platform was originally a Ripple fork but now it is a separate platform that works on the Stellar Consensus Protocol and has its native asset called Lumens (XLM). Stellar is a non-profit so it doesn’t charge its users for the network access but it has received initial funding and donations from supporters.

Stellar supports multi-currency transactions. The network makes it easy to send money across the borders due to almost instantaneous transactions (from 3 to 5 seconds) and uses anchors which issue assets on the Stellar Network. Anchors can hold a deposit and issue a credit and act as a gateway between different currencies and the Stellar Network. When people deposit money into their online accounts of an anchor on the Stellar Network, the deposits are recorded as credits in their accounts. After that, people can send payments and receive them from other users. All the money transactions are performed in as credits issued by anchors through trustlines. Users pay for each transaction a comparatively low fee of 0.00001 lumens. All the transaction fees are transferred into a fee pool and distributed among users through an “inflation vote.”


SilentWhispers is a decentralized path-based-transaction network without a public ledger presented by Moreno-Sanchez et al. This network is privacy-preserving because it doesn’t require a ledger to protect the integrity of transactions. SilentWhispers network was implemented as C++ library. The network enables transactions among users and guarantees their privacy. It uses a new distributed payment protocol for calculating a credit available between a sender and a receiver and doesn’t reveal any information about the credit. The experiment showed that transactions can be performed in about 1.3 seconds. Researchers think it can be deployed in the real world because it is efficient and scalable enough to cope with a growing number of users and money transactions.

GEO Protocol

GEO develops a protocol for decentralized P2P value exchange network of mutual trust. The unique feature of GEO Protocol is that it is not based on a common ledger and is blockchain agnostic. That allows it to connect various blockchains, as well as non-blockchain-based assets. Transactions are performed by local off-chain consensus of the participating nodes only. All data is stored by the nodes between which composite channels (a combination of state channels and trustlines) are installed.

GEO node is so lightweight it can be installed and ran even on an ordinary smartphone, turning it into a personal financial hub. There is no network fee for conducting transactions in the GEO network.

Due to its flexible infrastructure, GEO Protocol can be used as a highly efficient trustless payment network layer for existing blockchain systems and to simplify payments in fiat money through a network of distributed trust. That enables the creation of a de-facto decentralized credit network between the GEO network participants.

By default the loans in the network are free (provided that particular participants trust each other, it’s like you give a small loan to your friend). But GEO Protocol also allows the creation of third-party dApps, where any functionality can be implemented, including the creation of commercially motivated decentralized credit networks.


Peer-to-peer lending is an age-old practice which was traditionally associated with high risk and extreme locality. Today, the P2P model is being successfully digitized and delocalized and blockchain technologies such as immutable ledgers and smart contracts build additional trust and transparency on top of the existing P2P lending models. Decentralized credit networks on blockchain ensure global access to loans with competitive interest rates for individual borrowers and businesses by connecting them directly with willing lenders.

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