As peer-to-peer cash, it only seems logical that cryptocurrency should be deployed for P2P lending. While that application has taken time to materialize, bitcoin and other crypto assets are now increasingly fulfilling that purpose. Across the BTC, BCH and ETH networks, credit is being supplied to ordinary citizens while bypassing its traditional gatekeepers, usurping the authority of banks and credit agencies in the process.
The Evolution of Crypto Lending
P2P lending enables individuals and businesses to borrow money from one another. Facilitating this process has traditionally called for a middleman, known as a lending platform, to bring the counterparties together and custody the deal. For SMEs that have struggled to obtain credit through traditional means, P2P lending can be a lifeline, but it is one that can come at a high cost: lending platforms are known to levy significant fees, over and above those awarded to the lender.
The maturation of crypto assets has not rendered lending platforms redundant, but it has allowed for greater efficiencies, resulting in a better deal for both counterparties. Cryptocurrencies don’t just minimize the fees accrued by middlemen, which in this case are typically levied by the lending protocol: they also allow for new forms of digital assets to be collateralized, opening the door to possibilities that are not available within the legacy P2P system.
Finwhalex Conceives New Forms of Crypto Collateral
Finwhalex is a blockchain-based credit platform that’s devised a new collateralization system that allows Steam gaming assets to be swapped for cryptocurrency. With 10 million daily users and $4.3 billion in revenue, Steam is the largest gaming platform in the world. Finwhalex is applying the finishing touches to a system for integrating virtual assets into its collateralized system, enabling Steam users to unlock their illiquid gaming assets.
For digital natives, accustomed to working, living and playing online, swapping non-fungible digital assets for fungible ones such as bitcoin comes naturally. It’s just one of the many ways that P2P lending protocols are deriving liquidity from assets that the legacy financial system has refused to acknowledge, yet which hold significant untapped value.
Maker Dai CDPs Go Through the Roof
Meanwhile, the number of collateralized debt positions (CDP) in the Maker ecosystem has exploded over the last month, resulting in the issuance of $77 million worth of dai stablecoins. Much of this capital is locked into lending protocols that enable businesses and individuals to obtain a stable form of working capital without needing to sell their crypto assets – ETH in this case. The proliferation of CDPs in July, a 29X increase on the month prior, is thanks to an Earn.com campaign that encourages users to generate dai through locking ethereum within their Coinbase wallet.
Six of the top 10 dapps listed on defi.pulse are for lending protocols, with the Maker system followed by Compound, a money market protocol that allows anyone to supply assets to a liquidity pool in exchange for continuously-compounding interest. Rates adjust automatically based on supply and demand. $97 million is presently locked into Compound, followed by Instadapp, with $29 million. Built on top of the Makerdao protocol, Instadapp provides a user-friendly means of managing CDPs and is integrated with fellow defi products Uniswap and Kyber.
The Ethereum ecosystem has dominated P2P crypto lending, aided by its smart contract architecture that enables a diverse array of lending products to be created and automatically enforced. Without the once booming ICO industry to support it, Ethereum’s proponents have been desperately searching for the next use case, which may also account for why the defi narrative is being pushed so aggressively. Nevertheless, the ready availability of stable digital currency, with the suite of lending applications this unlocks, is sure to spark further innovation while granting startups and individuals greater access to capital. Last week, the number of daily ERC20 stablecoin transactions surpassed that of ETH, attesting to the growth of P2P lending on the network.
Bitcoin has not been left behind in the race to scale P2P lending solutions. Borrowers can obtain fiat cash in exchange for their BCH and BTC through lending platforms such as Nexo and Coinloan. With the latter platform, lenders can supply fiat or stablecoins and earn interest on their stake. Borrowers, meanwhile, can collateralize their bitcoin (or their XMR, LTC, CLT, or ONT) and obtain fiat currency or stablecoins. Coinloan matches lenders and borrowers and handles custody. Provided the borrower pays the interest they are due on time, their crypto collateral will not be touched.
Nexo operates a similar model, giving borrowers access to more than 45 fiat currencies. Over $100 million of crypto assets are held by Nexo, with Bitgo providing custody and assets fully insured. Coins such as BTC, XRP, and BNB can be used for collateral in exchange for a fiat loan which starts at 8% APR per year. One of the reasons why P2P lending platforms such as Nexo are so popular for crypto businesses is that there are no credit checks. Proving creditworthiness, particularly if you’re a new business, can be extremely difficult, and is one of the biggest impediments to startups getting off the ground. Blockchain businesses with crypto assets on hand have a means to bootstrap without needing to offload their precious cryptocurrency.
It’s a strategy that’s not without its risks, as a significant drawdown in crypto prices could force the liquidation of collateralized assets. Nevertheless, compared to the alternatives – negotiating with crypto-averse banks and extortionate lending platforms – P2P cryptocurrency lending solutions are a welcome alternative. They capture the spirit and utility for which bitcoin was designed and complement P2P exchanges such as local.bitcoin.com, resulting in a trustless and permissionless financial system that is open to all.
What in your view are the main advantages and disadvantages of P2P crypto lending? Let us know in the comments section below.
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