Obtaining Personal Loans With Block-Chain & P2P Lending
Block-chain and the platform business model characterizing p2p lending is a natural fit. By taking advantage of the block-chain technology, p2p lending platforms can create new business models and enable transactions independent of trust relations between lenders and borrowers. However, the technology also possesses a potential threat to existing p2p lending platforms if they are not able to innovate and utilize the possibilities contained in the block-chain technology. The same is also very true for traditional banks and credit unions
A block-chain is a digital redesign of an archive or log system called a ledger. Since ancient times, commercial transactions have been stored in ledgers, but they have always been prone to errors because they have relied on human inputs, which leads to added costs and inefficiencies for both organizations and the economic system as a whole. To avoid this, the block-chain technology is based on a combination of cryptography and distributed networks. The technology is, therefore, also closely related to cryptocurrencies – the most famous example being Bitcoin launched in 2008 to provide “…an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.” (Nakamoto, 2008).
Block-chain is at the core of the FinTech revolution and has the potential to cause radical change to a large number of industries, including financial services and P2P lending. The key advantage of using block-chain technology in peer-to-peer lending is that it can remove intermediaries from the lending process.
A block-chain is a distributed database, which is shared among and agreed upon a peer-to-peer network. It consists of a linked sequence of blocks, holding timestamped transactions that are secured by public-key cryptography and verified by the network community. Once an element is appended to the block-chain, it can not be altered, turning a block-chain into an immutable record of past activity.
Types of Block-chain
Block-chain is often talked about like it is all the same, but in reality, different types of block-chain exist. When most people talk about block-chain, they are actually talking about a permission-less public block-chain like Bitcoin or Ethereum (see table below), but other types of block-chain exist as well. While all types of block-chain share common features like a distributed network, cryptography, and timestamped transactions, there is a crucial difference in the ability of users to read and submit transactions to the block-chain. This ability depends on their access to transactions and carries important implications for how peer-to-peer platforms can utilize block-chain in P2P lending.
What is Block-chain-based P2P Lending?
Peer-to-peer lending connects investors/lenders with borrowers through an online platform acting as a trusted third party. The three main agents involved in this process are:
*Private individuals or institutions providing funding.
*An online p2p platform mediating the transaction.
*A business or private individual seeking funding.
However, in the traditional P2P lending model, a bank, credit union or another type of financial institution is needed as an intermediary to assist the peer-to-peer platform in securing objectivity in the transaction and build trust. The need for intermediaries and regulation mean that transactions on traditional peer-to-peer platforms are subject to added cost and time requirements as well as security issues.
Key Features of Block-chain and P2P Lending:
The two main characteristics of the block-chain technology are its trust evoking and decentralized nature – both characteristics that are also essential for the development of P2P lending. In the block-chain technology, trust and decentralization are inextricably interconnected: To create a decentralized network you need mechanisms to build trust, and decentralization enables the users to get involved in the network and establish the foundations for a consensus mechanism that can eliminate the need of a trusted third party.
Building Trust in P2P Lending Using Block-chain Technology: By Transparency, Data Integrity and Data Immutability
Moreover Enabling Decentralization in P2P Lending Using Block-chain Technology brings about :
Using of Smart Contracts in P2P Lending:
Largely due to the huge attention received by Bitcoin, block-chain is in the general public mostly known for its ability to process financial and monetary transactions. Nevertheless, another important aspect of the use of block-chain in peer-to-peer lending is the ability to create smart contracts, which ensure that transactions agreed upon by the parties (lenders/borrowers) are enforced autonomously following rules defined by the smart contract. In other words, a smart contract is a file with self-executing code based on parameters specified in the contract. Block-chains supporting the functionality of smart contracts are also referred to as block-chain 2.0.
In P2P lending, a smart contract would contain the initial loan amount and the repayment terms, including penalties if payments are late or missed. If a business makes a loan of, for example, $100,000 with a repayment term of 24 months at $5,000, the smart contract will automatically execute the payment requests, receive the payments, and adjust the due amount without the need of involving any intermediary. Also, it is possible to embed automatic compensation functions in the smart contract, like deducting percentages for early loan repayment, adjusting credit ratings, or converting to a higher yield currency.