Traditional lending has been around for centuries, yet over 1.7B people remain unbanked. While many don’t have access to banking services, part of this group chooses not to rely on them. Either because of credit requirements, expensive fees, or because they don’t trust them.
This could limit both their financial growth and slow down the economy. But there’s a simpler system that’s more flexible and efficient. And potentially with DeFi, free of middlemen.
- P2P lending is a system for users to directly lend/borrow from each other. There’s typically a moderating company holding custody of collaterals and, unlike traditional lending, doesn’t impose lending requirements.
- P2P lending platforms need to balance flexibility, security, and scalability. Overcoming these challenges could make them as competitive as traditional lenders, if not make the latter unnecessary.
- P2P lending didn’t gain much adoption despite its advantages over traditional banking. It regained relevance in 2020 after the rise of DeFi, and its long-term projection is positive.
What Is Peer-to-Peer Lending (P2P)?
P2P lending is the direct financial agreement between lenders and borrowers. Both 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 but more accessible and efficient. On decentralized marketplaces, anyone with collateral can borrow within minutes from anywhere in the world.
P2P lending slowly gained adoption since 2015 with the launch of UK-based Zopa, the first-ever marketplace. The trend slowed down after the 2008 financial crisis, then recovered momentum with new ones like LendingClub and Prosper.
This last one was the first marketplace to accept borrowers outside the US in 2010. Other companies joined like SoFi, RateSetter, Upstart, Kiva, and FundingCircle. The largest one was LendingClub after going public in 2014.
Other popular brands today include Mintos (Europe), RateSetter (UK), Bondora (Europe), and MyConstant (US and international).
P2P lending barely developed because of the lack of regulation, trust, and not enough lenders to sustain the marketplace. This would quickly change in 2020 after the disruption of Decentralized Finance (DeFi).
Traditional and Crypto Lending
Cryptocurrency alone didn’t change P2P lending as much as DeFi did. That’s because crypto lending isn’t that different from traditional lending. Changing the currency doesn’t change the process:
- Crypto lenders can be as centralized as traditional lenders and banks, except with different regulations and security.
- Both traditional and crypto lenders have high entry barriers. Cryptocurrencies are volatile, and without an efficient lending system, borrowers need at least 110% and as much as 200% collateral, which is impractical. TradFi lenders might need just 110%, but you still need to provide –legal proof of ownership for every asset provided.
- Both are risky in case of liquidation. Even blue-chip cryptos like Ethereum can change prices by 20% overnight. If that makes your collateral value goes below the security threshold, you lose it— even if prices recover the same day. Traditional lenders give you more opportunities to repay, but in the worst case, you lose your assets and credit score, which means worse interest rates and fewer loans available.
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.
Examples of non-P2P, centralized crypto lenders are Nexo, Celsius, BlockFi, Cred, Hodlnaut, YouHodler, Bitbond, and Genesis Trading.
Centralized vs Decentralized Crypto P2P Lending
P2P crypto lending isn’t just about switching assets. It’s neither just about direct agreements nor innovating for the sake of it. It’s because of the uncertain future of traditional lending that P2P lending has one.
Most centralized crypto lenders have collapsed and shut down, except for Nexo (fined and EIP banned from the US), Bitbond, Salt Lending, Ledn, and a smaller few. Whether it’s the FTX contagion or misused assets, centralized crypto hasn’t proven any safer than traditional finance.
That’s not to say that DeFi lending hasn’t gone wrong, especially in 2020 and 2022. Some risks are still unknown. Some can be designed around.
Here’s how they are different:
- 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 is “less risky” than credit-based lending. That’s because almost the entire marketplace is collateral loans and borrowers taking more risks. To favor both borrowers and lenders, lending platforms are working on two solutions: efficient protocols to reduce the collateral needed and KYC-free scoring systems to imitate credit and its benefits.
- 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 isn’t regulated compared to CeFi (yet?). This allows offering loans with greater risk-reward, although only in cryptocurrency or stablecoins. For good or for bad, DeFi might not achieve enough regulatory compliance to lend fiat currency.
Most DeFi lenders are by default P2P because there’s no company. An alternative type is algorithmic lending dApps (MakerDAO, Compound, Aave). Instead, a smart contract manages interest rates and tokens, still indirectly provided by users.
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 CeFi lending (both crypto and fiat-only).
Still, the flexible offer of P2P lending will likely bring other risks. Predatory lending, loan default risk, illegal financing, bug exploits, crypto market crashes, and insolvency and insolvency are more likely in absence of regulation. This will change as P2P marketplaces gain more adoption.As of January 2023, the global P2P lending market size is $143.64 billion vs ~$104B in 2022, $83B in 2021, and $67B before 2020. Although it likely won’t outgrow the traditional lending market, projections point to $700B – $800B by 2030.