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Digital assets: the answer to borrower defaults in P2P lending?

It’s no secret that peer-to-peer (P2P) lending has a collateral problem. Visit any online forum and you’ll see horror stories from investors who’ve lost money because of borrowers defaulting on loans. Either staked collateral was poorly-valued or illiquid, or there wasn’t any collateral at all.

What are digital assets?

A digital asset is any data you own that has value and can be transferred or otherwise manipulated electronically.

The problem with P2P lending today

Many P2P lending sites claim to use complex loan assessment algorithms to analyze the risks of borrower default. They claim these are better than traditional FICO-based systems.

  • Sell off bad loans to buyers for low returns.
  • Pursue legal action against a borrower who likely can’t repay.

Why cryptocurrencies make good collateral

Cryptocurrencies have real-world value.

Modern fiat currencies such as USD are only as valuable as their issuing bodies (usually governments) say they are. Digital currencies have more intrinsic value. Many of them are deflationary, for example, and being decentralized (not controlled by a central body), aren’t susceptible to the vagaries of central banking systems.

Cryptocurrencies have much higher liquidity than other assets.

Physical assets — like property or stock options — have real value but low liquidity. Collecting funds from these assets usually requires a price evaluation, multiple money transfers, and sometimes court action from a debtor. The process can take a long time and investors can end up waiting years to receive any money back from a defaulted loan.

Cryptocurrencies are trustless.

Blockchain technology is decentralized, or not run by one central entity. Cryptocurrency transactions are validated by members of the blockchain network, before being added to the permanent transaction record.

The bottom line

By investing in loans secured by digital assets, investors can participate in the highly profitable P2P lending market without worrying about poor risk-assessment. And lenders can leverage their digital assets to obtain competitive loans without cashing out their investments. Both can be part of a truly secure and trustless process working to benefit all parties.

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Peer-to-peer lending built on peer-to-peer technology. Refer & Earn $10 myconstant.com/referral | Website myconstant.com

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