Blockchain technology has been extolled as a game-changer for many industries. It is the backbone for most cryptocurrencies that transforms the whole world economy. The blog describes the impact of blockchain technology on Peer-to-Peer Lending platforms.
Peer to Peer lending is a method that connects lenders with borrowers directly. In P2P lending, no middleman or traditional bank is involved.
A prospective borrower can lend money from a lender without any role of the financial institute. It offers an advantageous platform for individual borrowers or small businesses to take a loan from the borrowers in terms of low-interest rates or the absence of strict banking system rules. Loan applications are rejected by banks due to poor credit history. Thus, it is a popular way of financing projects, business ideas, and personal loans from individual investors. Lenders or savers can invest their money and can earn higher returns and interest. In the past, it was primarily known as social lending.
Since 2005, the demand for peer-to-peer lending has quickly increased, after first being launched in the UK. It took the total amount of loans from £1.5m to £3.5bn in 2016. And that was only in the UK. In fact, the UK is very popular around the world for peer-to-peer lending with over 40 platforms. By 2020, P2P lending will become prevalent in businesses to connect with investors via peer-to-peer websites and market-wide platforms. The profile of borrowers is put out on peer-to-peer websites where lenders can choose by assessing their profiles and deciding whether they would like to risk lending money to a borrower.
P2P Crypto Lending follows the same method as conventional peer-to-peer lending which cuts out banks or middlemen. However here the lending is done through cryptocurrencies. Currently, the two most popular crypto coins are Bitcoin and Ethereum which are used to fund P2P loans. As cryptocurrencies are verging on the mainstream now, this P2P crypto lending has the potential to grow quickly all over the world which does not involve any banks or financial institutes.
Blockchain can truly transform peer-to-peer lending by offering transparency, and efficiency and can push it even further. Blockchain smart contracts are beneficial for p2p lending service providers or companies. It allows them to validate transactions, ensure the counterparties are legitimate, and perform routine account administration tasks almost quickly.
Loan tokenization is the other area where blockchain implementation is useful. The foundation of the traditional lending system is debt from trading. However, P2P loans do not include this. Implementing blockchain would enable the tokenization of loan assets, letting investors easily trade their loans with other P2P network members.
For example, a borrower creates a token and issues a smart contract that defines the repayment of a loan. Here, the monthly payments of interest will be done automatically. The investors will get their interest.
Blockchain is a decentralized ledger that offers a great benefit to P2P Lending. Traditional P2P lending involves the expense of keeping up with complex transaction histories and interactions between users. But applications built on blockchain can do this automatically. It records every single transaction which has been performed. These records are unalterable and become permanent once stored. Thus, it eliminates complex data recording structures and reduces expenses for lenders.
Last, combining blockchain with P2P lending puts a great impact on financial services and brings efficiency and transparency into its operations.