Blockchain is all about decentralisation, and it is impacting almost every territory in the realm of finance. In the vast expanse of the diverse facets of finance, loans stand significant. These loans, however, are confined to traditional banks. Although there are private loan agencies, they are extremely unregulated, and the interest rates might be exorbitant. The unification of cryptocurrencies with loans is bound to bring a drastic alteration to the landscape of loans and finance at large. One of the best ways in which crypto converges with loans is through a P2P crypto exchange platform.
Any business that connects demand with supply – or in other words, providers with customers – is bound to succeed. The world of mobile apps would call this business model as aggregation. When it comes to cryptocurrency loans, P2P crypto exchange software can connect borrowers with lenders over a streamlined peer-to-peer trading platform.
How do P2P crypto lending platforms work?
As the name suggests, crypto lending platforms do not lend their own funds, but they act as a mediator between borrowers and lenders. It might seem like a business model without any revenue, but the platform generates its revenue from the fees charged to the platform users.
Borrowers can be either an individual or an organisation that needs some funding. It is important to have security measures like multilayer security, KYC/AML verification, and authentication mechanisms to enable safer transactions.
There might be a lot of individuals and organisations who hold crypto assets but might not find the right avenues to turn them into profit. These exchange platforms provide them with the right channel to reap profits without compromising a lot on their security and returns. Since the entire ecosystem is decentralised, the lenders do not have to pay huge chunks of money to intermediaries. It is, in fact, the best option for people who do not want to sell their crypto assets but would still like to create a new revenue stream!
The detailed picture
Although on the surface, the P2P trading platform connects borrowers with lenders, there are a lot of intricacies that go under the hood. Let us look at the steps involved.
The investors or the lenders are first onboarded for accepting a loan request. The onboarding process has to be simple but at the same time, has to be comprehensive. After the investors are on board, their details are updated on the crypto lending platform.
Just like investors, borrowers also need to be on board. They can create their profiles on the platform by providing essential information. It is to be noted that the process also has to include a few vital details when it comes to borrowers, like KYC/AML, and their repayment capacities.
Once a borrower places an order, the matching engine works in the background to find a perfect match with the right lender. The lenders’ profiles are scrutinised using multiple variables like the required amount, the repayment window, and the assets that the borrower has placed as collateral.
Once the orders are matched, the borrower gets the requested loan amount in their wallet. The lender starts to earn interest on the loan amount based on the stated terms and as mutually agreed. Once the repayment of the loan is successfully completed, the borrower gets back the collateral. If the borrower does not repay the loan, the collateral value will be sold in the open market to have the loss amount recovered.
Advantages brought about by P2P exchange platforms
- These exchange platforms charge a very low-interest rate. It is quite likely that the interest rates will be lower than traditional banks.
- The streamlined process will connect borrowers and lenders, resulting in exemplifying decentralisation right at the core of the process.
- These leading platforms are not subject to any credit scores. Therefore, you are quite eligible to get a loan amount subject to a few conditions.
- Since the entire process happens on the blockchain, the process is instant and transparent. The transactions are extremely secure, and the chances of fraud are close to zero.
- When it comes to interest rates, these platforms are not only low but are extremely flexible. P2P lending platforms offer loans with interest calculated on a daily, monthly, quarterly, or even yearly basis.
Starting a P2P crypto lending business
It is quite evident that, just like a casino, the house always wins! Irrespective of the lender earning big interest or the borrower taking advantage of the loan amount, the exchange platform always earns interest. It is a dependable revenue generation model, and it is future-ready. It won’t be long before the banking industry embraces this new technology and new methodology for streamlining loans.
The first step towards creating the platform is to finalise on what services you have to offer. The accepted currency, the specific courses for which you will facilitate loans, and the currency/assets that you would be willing to accept as collateral should be clearly defined. It is important to have all these details figured out before you embark on the next step.
The next step is to create a technology platform. You can either choose to build your P2P crypto exchange platform from scratch or opt for a white label solution. Given the fact that the basic structure of any peer to peer trading platform remains the same, it is highly recommended that you go for white label products. Using white label solutions saves you a lot of time, money, and effort spent on fixing bugs of products created from scratch.
Have a collateral process in place. An efficient collateral mechanism mitigates the possibilities and intensity of risk. It is important to arrive at an LVR (loan to value ratio) to ensure that the platform does not stand liable. If the LVR is 60%, it means that if a borrower possesses crypto assets worth $100,000, they will be able to get a loan of $60,000.
Your platform will start to reap its profits only when there is money circulation. You will need to have borrowers to ensure that your platform starts to get recognised. You can market your platform by using classic digital marketing methods like search engine optimisation, social media marketing, forum participation, direct mailing, and influencer marketing. The presence of borrowers will automatically attract lenders, and this circle will keep continuing to grow, making your exchange platform extremely profitable.
In all of this, it should not be forgotten that your exchange as a business should be compliant with the legal and regulatory requirements. There is no one size fits all rule when it comes to regulatory compliance. Some jurisdictions have specific laws supporting crypto businesses, whereas some of them have pushed anything involving crypto to the illegal territory. However, there is a huge chunk of countries and legal systems that have no clue on how to deal with this revolution. Therefore, it is important to have all the legal aspects in place before you launch your P2P exchange.
Blockchain is probably the biggest reason behind the ecosystem of loans getting poised to undergo the Tinder or Uber revolution! With low fees for both the lender and the borrower, blockchain-base exchange platforms will slowly take over the traditional banking methods.
If you would like to capitalise on this wave of new business and reap your profit out of it, you can get in touch with blockchain app development companies specialising in the creation of crypto exchanges. They will understand your requirements and help build the perfect product for your crypto loan exchange business.