Peer-To-Peer Lending and How DeFi is Making it a Reality

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By Connor
Estimated reading: 6mins
 Peer-To-Peer Lending

Traditional lending has been around for centuries, yet over 1.7 billion people still don’t have bank accounts.

Most of the world’s unbanked population has been left out of the traditional financial system, but part of this group deliberately chooses not to rely on banks. That’s due to credit requirements, expensive fees, and because they simply don’t trust these centralized institutions.

That’s a significant hurdle in our world today. It limits the financial growth of individuals and slows down the broader economy.

But there’s a system that’s more flexible, fair, and efficient. Most importantly, it’s free of middlemen and doesn’t rely on blind trust. 

We’re talking, of course, about DeFi. Here’s why DeFi is the future of peer-to-peer lending.

Quick Takes:

  • P2P lending is a system for users to directly lend/borrow from each other. There’s typically a moderating company holding custody of collaterals. Unlike traditional lending, P2P lending doesn’t impose lending requirements.
  • P2P lending platforms need to balance flexibility, security, and scalability
  • P2P lending didn’t gain much adoption, despite its advantages over traditional banking. It regained relevance in 2020 thanks to the rise of DeFi. Today, its long-term projection is overwhelmingly positive.

What Is Peer-to-Peer Lending (P2P)?

P2P lending is the direct financial agreement between lenders and borrowers. Both parties connect through an online marketplace that ensures convenience and payment security for a fee. Whether there’s a regulated company or not, lenders make their own rules as to who and how to lend.

This contrasts with traditional lending (TradFi), where you must meet a credit score and income history to qualify. P2P isn’t just more flexible; it’s also more accessible and efficient. 

P2P lending actually predates DeFi and crypto.

It started gaining adoption in 2005, with the launch of a first-of-its-kind marketplace in the UK called Zopa. The trend slowed down after the 2008 financial crisis, then recovered momentum with new P2P lending services like LendingClub and Prosper.

Prosper was the first marketplace to accept borrowers outside the US, back in 2010. Other companies soon followed, like SoFi, RateSetter, Upstart, Kiva, and FundingCircle.

Other popular P2P providers today include Mintos (Europe), RateSetter (UK), Bondora (Europe), and MyConstant (US and international).

However, this form of P2P lending didn’t reach its full potential. Largely, this is due to the lack of trust and insufficient incentives for lenders to sustain the marketplace. 

That quickly changed in 2020, after Decentralized Finance (DeFi) rose to prominence and changed everything for the better.

Not all crypto lending is decentralized

Crypto, on its own, didn’t change P2P lending; the rise of DeFi did. 

That’s because some crypto lenders are just as centralized as traditional lenders and banks.

The best-known traditional lenders and banks are JP Morgan Chase, Bank of America, Wells Fargo, Citi, Discover, Capital One, American Express, and Marcus by Goldman Sachs. 

Meanwhile, there are also many centralized crypto lenders. These include Nexo, Celsius, BlockFi, Cred, Hodlnaut, YouHodler, Bitbond, and Genesis Trading.

For better or worse, these services play a significant role in the world today.

But there’s a better solution: decentralized P2P lending.

Why Decentralized Crypto P2P Lending Is Supreme

P2P crypto lending isn’t just about switching assets, nor is it just about direct agreements. It exists because of a true need for a better system.

Most centralized crypto lenders have collapsed and shut down, save for Nexo (fined and EIP banned from the US), Bitbond, Salt Lending, Ledn, and a few others. Whether it’s the FTX contagion or misused assets, centralized crypto hasn’t proven safer than traditional finance. 

While decentralized finance has had its fair share of theft and growing pains as well, newer true DeFi projects are able to better mitigate the risks that plagued the landscape’s early days.

Here’s why centralized crypto lending is inferior to decentralized lending:

  • Decentralized lending is more accessible: Users don’t need KYC or financial history for P2P lending. There are no credit scores, identities, or country restrictions. This increases the user base and brings more flexible options both for borrowers and lenders.
  • DeFi lending can be less risky than centralized lending. 
  • P2P lending marketplaces can offer better rates: For P2P marketplaces, the value isn’t about service variety as much as network size (similar to blockchain technology). The larger the user base, the more fee revenue and competitive rates for both peers. 
  • DeFi lending gives users control over how they loan and borrow value. This allows offering loans with greater risk-reward, in the form of crypto or stablecoins.

Most DeFi lenders are, by default, P2P. That’s because there is no centralized party or company involved in the process. 

The Future Of P2P Crypto Lending

With P2P online lending, users can get financing without going through traditional banks. Rather than a last resort, P2P marketplaces can become the go-to lending solution even for non-crypto investors. 

More loan offers, lower rates, and fewer entry barriers are some of the qualities that make P2P lending preferable over TradFi and CeFi lending.

Thanks to the emergence of DeFi, anyone with collateral can borrow within minutes from anywhere in the world by using a decentralized marketplace. 

Further still, the P2P lending landscape only seems to be growing

As of January last year, the global P2P lending market size is estimated at $143.64 billion USD. 

That’s up from ~$104 billion the year prior and $67 billion USD before 2020. Projections point to this market growing to a size of $700-800 billion USD by 2030. 

Easy and Safe P2P Lending With Liquid Loans

Liquid Loans is the industry-standard for decentralized lending.

It’s a true DeFi protocol with no admin keys.

Anyone, regardless of their background or technical experience level, can take out 0% interest-free loans on a timeless repayment schedule.

These loans can even be used to reinvest in the DeFi landscape, as a way to easily earn passive income.

Here’s how easy it is to get started with Liquid Loans.

Join The Leading Crypto Channel


Disclaimer:Please note that nothing on this website constitutes financial advice. Whilst every effort has been made to ensure that the information provided on this website is accurate, individuals must not rely on this information to make a financial or investment decision. Before making any decision, we strongly recommend you consult a qualified professional who should take into account your specific investment objectives, financial situation and individual needs.

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Connor is a US-based digital marketer and writer. He has a diverse military and academic background, but developed a passion over the years for blockchain and DeFi because of their potential to provide censorship resistance and financial freedom. Connor is dedicated to educating and inspiring others in the space, and is an active member and investor in the Ethereum, Hex, and PulseChain communities.

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