In this article, we will talk about P2P crypto lending. We will explain what type of lending is it and how it differs from conventional lending.
In P2P lending, loans aren’t issued by a legal entity, but by another person. Instead of a bank or financial institution, loan is provided by an individual. And the P2P lending platform acts only as an intermediary between the borrower and the lender: it sets certain rules of work and monitors these rules’ observance.
Types of P2P lending
The main difference between P2P lending and conventional lending is that the lender and the borrower are equal. These are ordinary users who conduct transactions with each other. P2P lending can work according to different rules, depending on the loan’s currency. It can be roughly divided into P2P lending for fiat currencies and P2P lending for cryptocurrencies.
P2P lending for fiat currencies: similar to bank loans. To receive such loans, you don’t need to secure them with a collateral, but you must go through a verification process. The P2P lending platform acts as an intermediary and helps the lender to collect the borrower’s debt in case of suspension of payments. More specifically, the P2P platform cooperates with repossession companies and provides legal support to the lender in court.
P2P lending for cryptocurrencies: crypto loans must be secured by collateral. To take out a loan, you need to leave a collateral in cryptocurrency, the amount of which will exceed the loan amount. If the borrower stops paying, the platform will take the debt and interest from the collateral and pay it back to the lender. So the lender will be insured against loan defaults. If the rate of the collateral cryptocurrency to the loan currency falls, then the lending platform informs both the lender and the borrower about it. Further actions depend on the rules of the specific P2P lending platform: for example, the borrower may have the opportunity to increase the amount of the collateral or return a part of the loan. Such platforms centrally store user funds. When a borrower takes out a loan, he takes the funds from the exact lender’s account, and not from the general account. Since P2P lending platforms have technical access to users’ funds, these platforms’ reputation is an important part of P2P cryptocurrency lending.
Lending secured by cryptocurrency in DeFi projects: loans must be secured by collateral. Lenders send funds to a smart contract, from which borrowers take funds. There is a separate smart contract for each cryptocurrency that is used by all lenders and borrowers of that coin. Since the DeFi lending process is fully automated, technical audits of smart contracts will be important for such DeFi projects.
Benefits of P2P crypto lending
Benefits for the lender:
- The ability to invest in cryptocurrency under flexible conditions: for example, you can set the interest rate and the period for which you issue a loan.
- Money Back Guarantee: either the borrower will return the debt with interest, or you will receive it along with interest from the collateral.
Benefits for the borrower:
- The ability to use cryptocurrency as collateral. If you have cryptocurrency assets and you need money, then you can leave the cryptocurrency as collateral and take out a loan in stablecoins. Then you can exchange these stablecoins for fiat currency and use as you see fit. At the same time, you don’t need to sell cryptocurrency.
- Simplified procedure for obtaining a loan. You just need to go to the website and register to take out a loan. At some P2P lending platforms, it will be necessary to pass a verification process. But you don’t need to go to the bank, stand in lines, provide your credit history and income statements.
- Choice of a loan conditions: if there are several ads from several lenders, you can choose the loan that suits you best.
P2P lending is a type of lending in which individuals are the lenders and borrowers. And the platform acts as an intermediary that connects lenders and borrowers with each other, sets lending rules and monitors their implementation.
Lenders get another investment tool with cryptocurrency with a money back guarantee. Borrowers are able to use cryptocurrency to obtain a loan without having to sell it.