The concept of Peer-to-Peer lending is old as the hills, one could argue that it was the first form of lending (since there were no banks or central authority to lend you something back then).
17th to 19th century was a "golden age" of p2p lending, but with the advancement of the banking industry peer-to-peer programs became less popular. As usual, convenience & ease of use led to the change.
But enough about history, let's dive deeper into online lending. This phenomenon started among online forum, where people knew each other, at least they thought they did.
Forum participants had deals, secured by their forum rating/status. A lot of the time deals were facilitated by administration/dedicated escrow, and fraudulent users had to face some real, thought online problems.
You can find threads and sections dedicated to this type of activity even know.
WebMoney (WM) Lending
In 1998, an online payment processor was founded in Russia. It had several interesting features:
Multi-tier ID verification
Trust Level (TL): score of the user's financial activity. Loans outstanding, repayments, etc. aka: How other people trust you with their money?
Business Level (BL): the aggregated rating of "Business activity". Included number and amount of transactions with different wallets.
On top of that, WM had a pretty ok API (Especially for the 2000s), and it was wildly popular to facilitate online transactions and had a lot of cash on/off-ramps.
All these factors caused it to be used for p2p lending, on forum boards at first and led to the creation of automated websites, where a WM's user with verification and a decent TL & BL got a loan in seconds.
Of course, scammers loved that market. You could obtain ID verification from a "trusted" provider pretty easily, and TL & BL could be artificially inflated in a week or so. Hence, the default rate and amount of fraud were crazy.
A couple of "WM credit ATMs" are still online, but I doubt their popularity.
Lending Club became the first online peer-to-peer lending company traded online. Founded in 2007 they had an astonishing growth rate, issued more than $35 billion of loans by March of 2018.
However, even with the advancement of FICO & technology tools to verify identity, the rate of default in the personal loan segment is high.
Crypto Loans to Save Them All
If 2017 was an ICO year, 2018 - the year of stablecoins, 2019 - was the DeFi year. But I would say not only DeFi but Crypto Financial in general.
Crypto loans providers reported sky-high numbers:
Celsius - $4.25 bln of loans issued;
Genesis Capital - $3.1blns of loans originated;
And it makes sense. One of the main problems the online lending industry faces - the default rate. And when even big corporations with sophisticated tools struggle, you can imagine the amount of fraud/default Peer-to-Peer markets face.
When the borrower has to provide 150-300% worth of collateral, his motivation to pay-out the loan is extremely high. Add asset appreciation expectation, and the default rate is slim to none.
Right now the market is extremely saturated with nexo leading the pack.
However, it is pretty easy to sell dollar-denominated returns of 8% on such a market. When European base rate is zero.
But consumer-facing loan providers are going through real trouble now, it is pretty clearly illustrated by DeFi rate data, provided by loanscan.
We have seen a steady decline in the last half a year. Signaling of oversupply of lenders. Even nexo had to lower their interest rate going as low as 5.9% when paid back in their token.
What good for lender, not always good for the borrower and Alex Masmej said it right: "The world is not made of rich Compound whales. Undercollaterelization is everywhere."
I would say, even more, unsecured loans became the standard for day-to-day life, you just need to have an iPhone and SSN, and voila, you got credit from Goldman via their partnership with Apple.
But as we discussed before, early solutions had a very high fraud rate and problems with payout enforcement. Plus tightening AML & KYC policies are making it harder and harder to come up with unique solutions.
A couple of crypto companies even announced their shut down due to the new AMLD5 regulation.
So What Are The Potential Options?
Some of my partners have years of experience in international PDL (Pay-day-loan) markets, and here are some takeaways from our conversations:
1. Financial Inclusion
For a lot of people, services like PDLs or crypto lending are the last resort. They go there because it is their last option.
If they not pay-out their debt, they will lose access to their last option to borrow, hence the motivation to pay is high.
2. Social Pressure
This is a bit different from region to region. For example, in Vietnam, it is discouraged in family circles to be known as a fraudulent borrower. At the same time in Russia, sometimes, it is an attribute of a "cool guy" to "scam" a bank or a credit organization.
Overall, it is an indicator of trustworthiness, so people usually tend to pay back the loans under social pressure.
How Does It All Blend In The Crypto Lending Paradigm?
Crypto offers some unique features, like Transparency and Immutability, opening the next degree of the online behavior assessment.
New concepts of digital identity are allowing to score people's online interactions and establish more direct social pressure.
Right now that market is in an infant stage, but a lot of good teams and smart people are working on that problem. Here is my list of people to follow/keep an eye on:
He shares a lot of good ideas in his twitter feed and recently published a post on The Defiant, which I highly recommend.
On top of that, he founded a telegram master group to enhance the discussion.
Their recent announcement of Flash Loans made some noise in the DeFi space. They are unsecured but technically complex and ultra-short-term mostly focused on arbitrage and fast settlement use-case.
A newcomer to the lending field, they claim to introduce up-to 150% LTV loans in Q2 of 2020 based on the data they will aggregate giving out standard crypto-backed loans. Their current claims will be the first to get access to under-collateralized loans. An ambitious claim and we yet to see could they deliver upon the promise.