What is Peer to Peer (P2P)?
P2P or Peer to Peer is a form of digital interaction that can take place between two or more parties that do not require a centralized or third-party participant. P2P Services are a form of interaction that uses P2P to complete tasks amongst the nodes or ‘peers’ that make up the network. In this way, the peers share resources and the computational load amongst themselves. P2P Services create an agreement between the parties on the peer network, allowing for efficient resource allocation and task completion.
P2P is deeply associated with Bitcoin and Blockchain technology. Though P2P is not only found in Blockchain technology. BitTorrent for example is a widely used piece of P2P file-sharing software that does not use the Blockchain. However, Blockchain technology is often using forms of P2P software. In fact Bitcoins original White Paper refers to itself as a form of P2P cash system, referencing its decentralization and lack of typical 3rd party intermediaries.
Understanding Peer-to-Peer Lending
P2P Lending is one form of P2P Service that can take place with traditional currencies as well as with cryptocurrencies. This is a P2P transaction service and functions in some ways like a traditional bank or lending platform. But with some key differences that make it attractive to both lenders and borrowers.
In the case of fiat currency P2P Lending, the service largely functions as a 3rd party platform that connects lenders and borrowers directly, without going through costly meditations and restrictions that are often found in traditional banking systems. Unlike traditional banks, P2P Lending does not source the capital needed for the loan. Instead, it functions as a platform that allows for the parties involved to agree on the terms and rates of the loan. In this sense, lenders could be more accurately described as ‘investors.’ Examples of P2P Lending services that offer fiat currencies are Lending Club, Peerform, and Prosper.
P2P and DeFi
In the case of cryptocurrency P2P Lending or what is sometimes referred to as DeFi or Decentralised Finance, there are some differences. This P2P Service uses ‘Smart Contracts’ to enact agreed lending and borrowing terms that become self-executing when the terms of the contract are met. This lending service uses collateral much like collateral is used in traditional fiat banking loans, allowing lenders or ‘investors’ to profit off the interest of said collateral.
Given the decentralized nature of DeFi cryptocurrency lending, it evades much of the time and monetary costs associated with 3rd party middlemen. Beyond this, the level of security associated with Blockchain technologies, as well as the anonymity, efficiency, and 24/7 access makes it a very attractive prospective platform for lenders and borrowers.
Right now P2P Crypto Lending is largely conducted with Etherum and functions through platforms like Compound, MakerDAO, and Aave.