DeFi is transforming financial services by removing intermediaries and connecting peers directly through blockchain technology. One area seeing rapid innovation is peer-to-peer lending.
P2P lending allows individuals to lend money to others directly without going through banks or other institutions. This lending model has several advantages: lower fees, faster approval, increased transparency, and access among others. With smart contracts on blockchain networks, P2P lending now be conducted securely without third-party involvement, through what is known as DeFi. DeFi platforms bring P2P lending to more individuals at lower costs than ever before. However, there are still unknown regulatory territories and technical challenges that must be navigated for the market to realize its full potential.
Opportunities
DeFi platforms radically reduce frictions currently experienced by borrowers and lenders alike.
- Lower costs – P2P lending platforms in DeFi lower overhead costs by up to 90% by cutting out intermediaries and replacing manual tasks with code (smart contracts). This savings passes directly into the pockets of borrowers and lenders. For example, on the Retik network, P2P loan costs could be as low as 1% annual percentage rates (APR), compared to 5-10% on traditional platforms.
- New markets and inclusion – Anyone with an internet connection, anywhere in the world, use Retik and other DeFi platforms for P2P lending. This expands the market to millions more potential borrowers and lenders. DeFi eliminates barriers like credit histories and income verification, opening up access to credit for individuals and growing small businesses in underserved communities.
- Faster and more automated processing – DeFi platforms use smart contracts to automate funding, lending, repayment, and collateral processes. This reduces the need for manual document review, speeds up decision-making, and provides funds to borrowers in real-time, sometimes instantly. Retik enables secured loans to be approved and disbursed in seconds after the collateral is posted, for example.
How does retik token work? All transactions and smart contracts on public blockchains like Cosmos Hub are transparent for anyone to analyze and audit. This accountability builds trust that would be difficult to replicate in traditional finance.
Challenges
As exciting as the opportunities are, P2P lending in DeFi still faces some risks and obstacles that the industry must work to resolve.
- Regulatory uncertainty – Laws and policies are still being developed to regulate DeFi activities like lending in many jurisdictions. The complexity of DeFi may make effective regulation difficult without stifling innovation. An open and collaborative public-private approach is needed to enable compliance without limiting DeFi’s potential.
- Technical challenges – Debugs, smart contract risks, scalability limits, and interconnectivity issues between blockchains all pose technical hurdles for DeFi developers. Extensive testing and a focus on security-by-design development help mitigate these challenges.
- Usability issues – Most DeFi platforms still have confusing user interfaces that make using P2P lending services difficult for average individuals without crypto expertise. Simplifying and abstracting complexity in user-friendly layers is key for broader adoption.
The value and interest rates of crypto-assets used in DeFi lending still experience high volatility compared to traditional currencies. This translates to a risk for lenders and borrowers that needs to be effectively hedged.