The peer-to-peer lending industry is still relatively new both to investors and borrowers. Thus, many people prefer to stack cryptocurrencies, which leads to the funds' loss. But in reality, a P2P lending platform is a perfect and safe way to earn a stable passive income in the crypto world.
Today I want to share with you a comprehensive analysis of the peer-to-peer lending industry to show you that it is not as scary as critics may describe it. You’ll see the true potential of this phenomenon and how it can change the world. Buckle up, it will be a fascinating journey!
What are peer-to-peer lending and borrowing?
Lending and borrowing in traditional finance institutions look identical no matter the region. Lenders put money on deposit at the bank or credit bureau, giving the intermediate a full right to dispose of that money until the end of the deposit.
Financial institutions provide that money to borrowers and ask them to pay on time but with added interest. Later, they give money with some share of interest to the lender and leave themselves some part of the interest (usually, it’s half of it).
But how does it work with P2P lending? There are no intermediates. Individuals can directly lend or borrow money from one another. Borrowers sign up for a loan, providing the P2P platform with a credit score, income, and money they want to borrow.
A lender signs into the same platform and explores loans. Once they find a perfect opportunity to invest, they fund borrowers. The borrowers pay the rent and interest until they pay it off.
P2P loans have lower interest rates, despite lenders getting similar interest payments. There are no intermediates that take their share of the interest. The borrowing process is transparent: both parties see all crucial info about loan terms, fees, schedules, etc. It allows investors to diversify their portfolios. Some P2P platforms are starting to create their credit scoring system that is available anywhere 24/7. Traditional score models rely on data from several credit bureaus that are unavailable to everyone. Especially, when lenders and borrowers live in different regions.
Cryptocurrencies in peer-to-peer lending and borrowing
Most users prefer crypto over traditional options due to transparent cross-border payments: both parties can achieve fast transactions with low fees regardless of the region. Banks and credit bureaus like to change the contract details without notifying the lender and borrower.
In P2P, all deal details are prescribed in the smart contract, which cannot be altered. If a lender wants to modify the loan, they should set an agreement with the lender and put in a new deal.
At the same time, all deals stay anonymous. Lenders only see borrowers’ credit scores. It will be useful for those who don’t like to share their personal information online. For instance, Bitbond uses a proprietary scoring system that considers multiple factors, including the borrower's socials and transaction history on the Bitcoin blockchain.
Borrowers can offer their other cryptocurrency holdings as collateral if they miss a payment. Investors don’t have to land the borrower single-handedly; they can purchase just a fraction of the loan.
So, some loans can transform into crowdfunding projects. Celsius Network, Salt Lending, and Nexo use a collateral principle where borrowers can access loans up to 50-70% of the value of their cryptocurrency holdings. That way, services ensure investors will get their money + interest.
Advantages of using cryptocurrencies in peer-to-peer lending and borrowing
- Users like P2P lending due to lower transactional fees. They don’t have intermediaries, such as banks or credit unions. You can witness it on Bitbond and YouHolder platforms.
- Crypto-borrowing has faster settlement times. You can see it in Celsius Network, Nexo, and Cred platforms. Unlike banks, P2P marketplaces work 24/7 on holidays. They don’t have arbitrators who should approve the loan.
- All demands to a borrower are pre-described in the smart contract. It reduces the waiting time from submission to approval and gives both parties more transparency.
- Users from poor third-world countries finally get access to the global markets. Usually, they can’t open an investment account in first-world countries. Blockchain and P2P marketplaces give them access to the international market. DeFi Money Market, Ripio Credit Market, and Aave are the best-known examples of platforms that promote themselves as international lenders.
- Crypto borrowing is also a more cyber-secure option. It may sound silly, but it’s true. Banks and credit unions usually have a main server that stores crucial data. If hackers crack it, they’ll get access to the client’s accounts. Cryptocurrencies have a decentralized nature, so there is no main server. It is almost impossible to hack a blockchain.
The only thing that may happen, is that if both parties share their public and private keys due to phishing scams, hackers would have access to those two accounts. But not the whole chain. In banks, when hackers crack servers, they have access to all user data stored there.
Popular cryptocurrencies in peer-to-peer lending and borrowing
Those platforms use the most popular digital coins with predictable prices. You won’t find here new cryptocurrencies with highly-volatile prices. And this decision is totally understandable: those services try their best to keep service profitable for lenders and accessible for borrowers.
The two most common digital coins out there are Bitcoin and Ethereum. Those are the most famous digital currencies in the world with predictable prices. You can also find Tether (USDT, a stablecoin pegged to the US dollar price) and Bitcoin Cash (fast and scalable stablecoin pegged to the Bitcoin).
Speaking of not-so-popular digital coins, you can also find Ripple and Litecoin. But, as I said, you don’t find coins here that have been created just for a joke like Dogecoin.
Challenges and criticisms of using cryptocurrencies in peer-to-peer lending and borrowing
Many people criticize P2P lending platforms for price volatility. But potential investors already know it and they are willing to risk it. But even regardless of crypto reputation, there are still many popular, even riskiest options like IPO, ventures, REITs, and foreign emerging markets. But people still invest there to get fast money. The only thing that prevents critics from doing it with cryptocurrencies is their own biases.
Another common concern is security. But there is nothing to be worried about. Crypto doesn’t have a main server. Even when hackers get physical access to some nodes, they can’t modify information. They need to remove the chain from all nodes and get public and private keys for all blockchain members. It’s impossible with popular currencies because they have millions of members.
The only true challenges of P2P lending platforms are lack of awareness and limited acceptance. Due to constant criticisms, crypto is an option for tech-savvy people. Crypto lending still awaits regulations. It’s a new industry, so regulators wait for wider acceptance to see what laws they should set.
Future of cryptocurrencies in peer-to-peer lending and borrowing
The future of crypto lending platforms looks promising. Even though modern acceptance is relatively slow, it still happens. But we should remember that any disruptive technology initially has a lower acceptance rate: even mobile phones and digital banks were “scary tech” to general users.
The same story will happen with crypto loans. They allow people to borrow and invest without intermediaries. They open doors to new fast cross-border financial opportunities. Those practices will become a common feature of many DeFi platforms.
Central banks will also notice this opportunity, so we may see central bank digital currencies. For instance, the Ukrainian central bank develops its own stablecoin called e-hryvnia pegged to the price of the Ukrainian hryvnia. The Ukrainian government is pushing crypto acceptance in the country even more, promoting e-hryvnia as a distinct payment option equal to credit cards.
So, potentially users may be able to take a P2P loan in their native cryptocurrency from another person without any intermediates. It opens up enormous opportunities both for individuals and businesses of every size.
Peer-to-peer lending is a practice that can change the finance industry for good. You don’t need to wait for an answer from a bank. Borrowers can ask for a loan and get funds from a person who lives halfway across the world. On the other hand, an investor gets an opportunity to multiply their money due to global cryptocurrency access.
On the tech side, P2P lending and borrowing are far more secure than traditional institutions. Banks and credit bureaus often have a main server, which is hard but possible to crack. So, hackers can get access to the whole client base.
P2P platforms don’t have a central server. All data is distributed among nodes. If a hacker wants to hack the blockchain, they need to collect the public and private keys of all users, and physically remove information from all connected devices. It’s physically impossible with popular blockchains.
Users can be calm about their cyber security. They just need to save their private keys in some secure place, like a cold wallet, or use a safe multi-currency wallet like Defiway. If you want to stay tuned with the latest crypto updates, subscribe to our socials and save our blog in your reading list!