Before banks came into existence, lending and borrowing of money were often carried out person-to-person. And this was the order of the day. The custom took precedence and all was okay until certain individuals couldn’t be trusted.
With trust broken, third parties, as well as intermediaries, were thrown into the equation. This meant they became go-between lenders and borrowers.
For that, they protected financial deals between individuals. In so doing they charged exorbitant fees while complicating matters even more by imposing regulations on how people can lend and borrow money from one another. The rise of middlemen caused a rift.
The very nature of blockchain is “trustless”
But that’s not the case with blockchain. It is designed from a decentralized lending standpoint making it possible for individuals to share and transfer assets to one another – without the need of an intermediary or third party – think lending institutions – to oversee the transaction.
Through this fact alone, blockchain can take us back to the early days where the peer-to-peer lending model took great precedence and was effective. In fact, if this practice was to be revived, blockchain would propel to greater heights and nothing could be greater than that.
Benefits of Blockchain Peer-To-Peer Lending Practice
Imagine being a small business owner with quick access to credit. Wouldn’t that propel your business to new heights? However, that’s not possible today as small-to-medium enterprises have to go through numerous hoops before accessing credit from traditional lenders.
If many businesses – small and large – were given the option to access credit easily without going through the banks, most of them would gladly take this path in an instant.
There are financing options such as ICOs and crowdfunding that have progressively embraced new forms of raising funds. Their rapid rise speaks of a willingness to seek alternative financing options for businesses as well as individuals.
The entry of blockchain in the market could make lending easy and timeless from one individual to another – never mind reducing the amount of time it takes for the lending process to go through. The practice would also be seamless, no doubt.
Most traditional lenders such as banks would be rendered useless because a borrower only needs to directly connect with a willing lender without involving an intermediary (or bank). The upside of blockchain and its decentralized lending model is, a borrower can access a valuable financing option that meets their needs without constraints of location affects them.
That’s because blockchain is not affected by geography. With a single request, you can reach out to a willing lender from any part of the world and access competitive financing options. It is this freedom that makes blockchain peer-to-peer lending practices highly effective.
The costs of lending and time it takes for the process to go through is greatly reduced thanks to smart contracts. These contracts allow a lender to quickly validate a transaction and confirm its legitimacy. It helps even perform quick administration account tasks enhancing the speed of the lending and borrowing process.
While blockchain is reliably convenient and efficient, an intermediary is required to carry out background checks on every address. Because the system can trivially award credit ratings. With the help of an intermediary, all addresses can be thoroughly scrutinized in great detail.
Remember all blockchain transactions are easy to audit. That means they are open. So if there’s any activity in an address that looks suspicious, it’s quickly picked up by a lender who can easily cut off links with a borrower and deny those services to them.
Banks Are Less Likely To Allow Peer-to-peer Lending Model to Take Flight
Banks are now keen to embrace technology if their innovation units are anything to go by. And one good example is the Credit Suisse and ING. They’ve employed blockchain-based collateral lending application that swaps high-quality liquid assets with money.
So its true traditional lenders are incorporating blockchain to optimize and enhance their lending and borrowing operations. If more banks and lenders can utilize blockchain in every way, it will be easier to connect so many parties in the system. This would make it easier for customers to connect directly to a lending institution such as a bank.
And transparency would make the process viable because a lender can view all your real-time transactions and finances on a distributed ledger that is blocking. This means banks don’t have to employ a sophisticated system to perform background checks on a borrower.
These are costs that can be impacted on the borrower was the time consuming and costly by any chance. A lending decision becomes easier to make on the part of a lender when everything is in the open including outstanding utility bills, cash flow in an account and all transactions in detail.
What this means is, traditional lenders such as banks or online short-term lenders can utilize technology to make lending decisions a lot easier and faster just like www.realisticloans.com. Also with the help of smart contracts feature, they can generate a system that checks the creditworthiness of an individual before lending the money.
Creating such an automated blockchain lending system would be greatly useful and beneficial in numerous ways including:
- Digitizing contracts
- Automating loan settlement processes
- Reducing fraud
- Minimizing errors
- Increased efficiency
Besides efficiency, the blockchain system can automate all the lending processes reducing time and improving workflow. The blockchain system also plays a key role in storing sensitive data and providing secure transmissions.
Then again, as an investor or regulator and an auditor, you can gain easy and safe access on user’s data. The system is simply transparent as earlier mentioned.
Blockchain Model Is a Work-In-Progress
But even as blockchain is a force to reckon with, it’s important to remember that this lending system is young and at the infancy stage. In other words, it’s a real challenge to incorporate it in the system because for starters it’s difficult to collect a loan made on the blockchain.
Adopting this lending system will take a while. Because there are numerous hurdles on its way: How do you verify the user’s identity on the blockchain? How do you determine a customer’s creditworthiness? Then again, how will the system enforce “know-your-customer” (KYC) rules?
There are so many questions left unanswered. By employing the peer-to-peer lending model across countries, it will require a framework like a regulatory body to test the legality of the blockchain and how well the smart contracts feature will fair when tested.
You could say the blockchain is a work-in-progress. It’s a child learning to walk before it can crawl, and that poses a huge problem. Blockchain is accepted and legalized in a few countries, but this does not make it legal in other countries as well. So it’ll be a while before people can experience peer-to-peer blockchain lending model as a valid way to lend and borrow money.
As we speak right now, blockchain smart contracts are unrecognized by courts. So it’s not even a formal way of doing business across any platform. That makes it a huge problem.
While blockchain can record any transactions taking place on its platform, it is challenging to enforce any laws on it or even evaluate and manage the risks involved.
For now, blockchain remains a platform at its infancy, and without the capabilities to employ any tools to handle complex operations within its systems.