The primary use case for cryptocurrencies thus far has far and away been as a speculative investment. Speculators, traders, and investors make up a vast majority of the cryptocurrency market. While the end goal is for the world to be cryptocurrency users, right now it's not.
However, that does not stop the innovators and early adopters from actually using cryptocurrencies as they are intended and paving the way for their use in the future of finance. One such activity these early users are doing is P2P lending using cryptocurrency.
In this way, users are using their investment in cryptocurrency as the money for investing in P2P cryptocurrency loans. This idea may seem foreign to the non-cryptocurrency user. But, for those deeply involved in cryptocurrency, this is progress, and a great way to earn more cryptocurrency.
Peer to peer lending is very much a part of the rapidly growing P2P or “sharing economy”. Like Uber and Airbnb the idea is simple. Connect a person who wants something like a ride with someone who can give a ride (driver with a car) and wants to earn more money using technology. The idea behind P2P lending is the same. Connect those that need a loan with those that have money to lend and want to earn interest.
While the idea is great and the implementation doesn’t seem hard, its actually impossible for this to work on fiat(money). Lending Club and Prosper are two of the most popular “P2P Lending Platforms” likely found this out quite quickly.
While both slightly accomplish the spirit of the idea, because of laws and regulations the idea turns into more of a marketing ploy. Current protectionist laws made for banks ensure that people cannot do this directly. So while both these companies have marketing and a user interface that displays both sides, a bank still makes the loan not the lenders.
In the same time period that P2P technologies were getting started, arguably one of the most important P2P services was also being developed. Launched in 2009 the “P2P electronic cash system Bitcoin” was launched into the world, and a solution for true P2P lending was born.
If you are reading this you probably already understand Bitcoin, but if you don’t here is a good place to get started. But P2P money is the perfect fit for P2P lending as the technology is truly P2P.
No bank, government, or any sort of 3rd party needed at all. Anyone from anywhere in the world is able to send money to anyone else and nobody can stop them.
So while Bitcoin had the ability to borrow money to anybody else, that didn’t mean they had a place to do it. Centralized “marketplaces” or services are still needed to connect borrowers and lenders and provide each party with the tools and information necessary to make a deal.
Btcjam.com was the first, largest, and most well known of the true P2P lending platforms using Bitcoin. It was a great website, fun, easy to use, and it grew rapidly enabling millions of dollars worth of Bitcoin loans to be borrowed and lent from users all over the world.
However, the company very quickly experienced and learned lessons the hard way of using a new world changing cryptocurrency like Bitcoin. Poor verification standards, flawed ranking systems, and Bitcoin’s volatility all lead to extremely high default rates and the failure of the project.
The P2P Bitcoin lending industry however persevered and survived and can still be used today.
Today there are still multiple platforms for P2P cryptocurrency lending, though more can be expected in the future. The 1 remaining Bitcoin P2P cryptocurrency lending platform is Btcpop.co.
Bitbond is another Bitcoin P2P lending platform, but their focus has shifted from the P2P end and almost all loans are fiat based and funded by pools. They also primarily only found USD based loans, where as Btcpop.co funds primarily Bitcoin Loans.
Btcpop’s main tool for combating the extremely high default rates in cryptocurrency lending is altcoin collateral, and physical letter verification. They also adopt a free market approach giving borrowers the ability to completely customize their loan offerings. They also give lenders complete freedom to invest how they want. Since management changed default rates at btcpop have gone down dramatically.
Using the same cryptocurrency collateral method as Btcpop, Ethlend is the main Ethereum based P2P lending platform. While it has gone through some growing pains, the platform remains fully operational today and takes P2P a step further with Ethereum loans happening within Ethlend’s smart contracts on the Ethereum network.
Ethlend is currently not available to US IP addresses, and the lending platform itself is accessed through your own metamask ethereum browser wallet. The platform has its own ERC20 token which is used for cheaper lending and ETH base pair. Most Ethlend loans are denominated in either ETH or USD. However, all payments are made in ETH.
Ethlend is very low volume now, but it's an innovative and truly P2P solution that has many potential use cases and could evolve into something special.
So it might be awhile until P2P banking takes over regular banking. But, innovators and early adopters are working on it.
As for investing in P2P cryptocurrency lending, it’s risky business but its getting safer. The best rule of thumb is like any investment to practice extreme caution and make sure to take risk/rewards into account.
Safe collateralized P2P loans at a low cryptocurrency denominated APR are a good investment. Verification only P2P loans in cryptocurrency even with high APR, are probably not at this time.
