P2P Lending Vs Bank Loans
Taking loans from banks have become inefficient, unprofitable, hard, and time-taking for people today. You need collateral if you will apply for a loan from a bank. This is aside series of documents that need to be prepared before your applications can be approved. All of these processes are time-consuming especially for people who need funds urgently to maintain cash-flow in their businesses. Peer-to-peer (P2P) lending platforms come into the scene to remove all form of intermediaries to connect the lender and the borrower directly. Though these centralized platforms collect fees, their fees are far lesser. It takes a short while to complete processes needed to successfully take a loan.
P2p Lending Platforms
Sometimes, the mode of operation for these P2P lending platforms is very different from the traditional ways of applying for loans. Money is rendered in the form of help to the borrower, after a few days, the giver is eligible to receive help from other platform member. The giver receives the amount he had lent out with an interest at the end of the day. Since the platform connects the borrower and the lender to interact directly, transfer of funds does not take time or effort. The platform requests proof of payments from the lender and allows the borrower to confirm that they have received the funds. Banks statements are requested from both parties when disputes arises.
One of the major failure of this kind of platform is that they are centralized thus they are mostly applicable to participants from a region or country. It is easy for members to game the system for untruthfulness. Fake Proof of payments can be submitted by platform members. Huge platform bonuses (e.g. referral bonuses) has been a pitfall for many of these platforms too. Sometimes failure to fulfill pledges can clog the system and thus slowing the system down. These scenario reduces the trust of the members thus crashing the whole system.
The blockchain Aide
The blockchain technology can be introduced into P2P lending system to help improve its services thus making people’s lives better. It serves as a trustless system which is immutable and game-proof. It can aide the connection of parties without the need for intermediaries no matter the distance. There are no border barriers on the blockchain. Also, remittances of funds are faster with less fee on the blockchain no matter the distance.
Centralized P2P lending platforms can be launched on the blockchain network to help all. Since there will be KYC and legal terms to be agreed to on the blockchain will ensure legal compliance. Cryptocurrencies like stable coins or asset-backed coins (for example Diamcoin) can be used as a mode of funds transfer on P2P lending platforms. The reason is that these coins are securities which are backed by real assets therefore, they do not change prices no matter the market condition.
Diamcoin is a utility token which is backed by real diamonds. The team had recently announced that there is about $150million worth of Diamond locked up for the specific purpose. Diamond rarely changes in price.
There will be no proof of payment needed on blockchain based P2P lending platforms except the transaction hash which is transparent and visible to all. This will nullify the ability to fake proof of payments since blockchain transactions cannot be edited or gamed. It will be impossible to request for funds on these kind of platform if a member hasn’t first provided help to other members. These activities can also be recorded on the blockchain where they cannot be changed.
The blockchain can be used to improve the services of a P2P lending platform beyond the coverage of this article.