Peer to peer microlending service done right!

[alexykot]

Hi all


Have an idea - a proper peer to peer microlending platform based on Bitcoin - anonymous, scam-proof, open source, low-cost and socially positive.

So, I want to build an online service that will provide this. Main question is how to do it scam-proof? Answer is simple - it will be invite-only for borrowers. Only an existing borrower with established reputation will be able to invite new borrower into the system, and inviting party will act as guarantor for the invitee. If invitee will go default, not only his reputation will severely degrade, but his guarantor’s reputation also. This will really make people think whom they are inviting, and also will allow to track and stop not only scammers themselves, but their entrypoints also really quickly. Of cource I'm not promising to weed out ALL scams completely, but I think it's possible to keep scam level low enough without expensive formal due diligence process.
There are more details to my concept, I've described it all on the bitcoinstarter.com page https://bitcoinstarter.com/projects/114.

I’m capable of building this thing, and actually started working on it already. I will make this service opensource to enable competition in this area.
I know there is a similar service already doing bitcoin p2p microlending, but with arbitrage firm they have involved recently I think they are going completely wrong way.

I’m crowdfunding development at bitcoinstarter.com right now here https://bitcoinstarter.com/projects/114. Comment, criticize or support it, I want to know what you think!


Thanks,
Alex

[empoweoqwj]

Sounds like an interesting idea.

Isn't the problem that people needing to borrow money are inherently risky propositions? So who in their right mind is going to guarantee that risk? What's in it for them?

[Peter Lambert]

Why does it need to be anonymous? I don't think you can have both anonymous and scam-proof at the same time for a lending platform.

[alexykot]

Why does it need to be anonymous? I don't think you can have both anonymous and scam-proof at the same time for a lending platform.

Being non-anonymous doesn't prevent scams, because they always can use fake identity. Demanding non-anonymity is not designed to prevent scams, it is designed to scare scams and allow prosecution after scam was revealed. However, in practice prosecution is costy and not effective, especially in bitcoin-based system, so it doesn't help scaring scams away and doesn't prevent scamming in general.

I'm making a system that instead of prosecuting scams post factum will prevent scams from entering the system in the first place.

[alexykot]

Sounds like an interesting idea.

Isn't the problem that people needing to borrow money are inherently risky propositions? So who in their right mind is going to guarantee that risk? What's in it for them?

Hmm, in general any investment is risky, in bitcoin, fiat, gold or anything else.
The task is to make risk as low as possible by tossing away those who do not intend to be honest borrowers. Risk in lending is defaults, default can happen because an honest borrower met unforeseen problems, or because the borrower is a scam. The percent of honest borrowers with unforeseen problems is statistically predictable and rather low, the amount of scams is less predictable and much higher, if there are no counter-scam forces.
What I'm doing is creating a counter-scam system where the borrowers will be responsible for each other and will have both means and incentive to keep scams away from the system.

There is no guarantee for the risk, same as there is no guarantee for p2p lending in fiat currencies. But there are known ways to mitigate risks - spread investments between many borrowers and keep scams away to lower overall defaults percent.

[inspiredinvestor]

alexykot, I am interested in peer to peer lending too, If was one of the things that triggered my interest in BTC in the first place. anonymous fine, but there needs maybe some kind of security it's tied too,
It would be interesting to see how the peer to peer lending companies like prosper manage this, WHILE keeping it anonymous

a worthwhile challenge I believe

[alexykot]

alexykot, I am interested in peer to peer lending too, If was one of the things that triggered my interest in BTC in the first place. anonymous fine, but there needs maybe some kind of security it's tied too,
It would be interesting to see how the peer to peer lending companies like prosper manage this, WHILE keeping it anonymous

a worthwhile challenge I believe

Prosper.com is not anonymous actually. They know who borrowers are, they just don't tell it to lenders. So it's private but not anonymous. 
On security - in Prosper the whole loan security is based on their due diligence of the potential borrowers. This works in general, but it's expensive and requires an extensive network of Field Partners actually gathering data and doing due diligence.
My idea is that formal due diligence can be replaced by informal due diligence run by those who know potential borrowers personally. If these informal due diligence agents will have incentive to run it properly - it might be enough to maintain overall system security without involving formal checks. I think it's mainly about giving them right incentive. 
 

[alexykot]

Why does it need to be anonymous? I don't think you can have both anonymous and scam-proof at the same time for a lending platform.

Being non-anonymous doesn't prevent scams, because they always can use fake identity. Demanding non-anonymity is not designed to prevent scams, it is designed to scare scams and allow prosecution after scam was revealed. However, in practice prosecution is costy and not effective, especially in bitcoin-based system, so it doesn't help scaring scams away and doesn't prevent scamming in general.

I'm making a system that instead of prosecuting scams post factum will prevent scams from entering the system in the first place.

It is impossible to weed scams out before entering. I could run a scam right now and people would trust me cause I built trust up. So this means your just trying to hype up your platform that is really just like every other platform or you don't understand  how this market works.

I'm trying to get clever criticism and peer reviews of the idea. There is no platform yet to create hype around.

So, why do you think it's impossible to weed scams out? Classic lending and microlending institutions right now are tossing scams away effectively, but at a cost of formal due diligence applied to every potential borrower. And still a well prepared professional scammer will get through, because he will prepare and provide trustful legend and supply trustful (fake) documents to support it.

My idea is that we can replace formal due diligence with an informal one, run by those who know potential borrower in person. If you know someone personally, you can judge if he is a scammer or not, and most likely - a real scammer will not even go to you with this, as he knows that you know that he is a scammer. 

My idea is not about giving out referrals to anybody you're "in friends" on facebook. It's about to refer only those few who you know and trust in person. And I think it's a matter of giving people right incentive to on the one hand - be willing to get into and get benefits, and on the other - to choose wisely.

[alexykot]

Why does it need to be anonymous? I don't think you can have both anonymous and scam-proof at the same time for a lending platform.

Being non-anonymous doesn't prevent scams, because they always can use fake identity. Demanding non-anonymity is not designed to prevent scams, it is designed to scare scams and allow prosecution after scam was revealed. However, in practice prosecution is costy and not effective, especially in bitcoin-based system, so it doesn't help scaring scams away and doesn't prevent scamming in general.

I'm making a system that instead of prosecuting scams post factum will prevent scams from entering the system in the first place.

It is impossible to weed scams out before entering. I could run a scam right now and people would trust me cause I built trust up. So this means your just trying to hype up your platform that is really just like every other platform or you don't understand  how this market works.

I'm trying to get clever criticism and peer reviews of the idea. There is no platform yet to create hype around.

So, why do you think it's impossible to weed scams out? Classic lending and microlending institutions right now are tossing scams away effectively, but at a cost of formal due diligence applied to every potential borrower. And still a well prepared professional scammer will get through, because he will prepare and provide trustful legend and supply trustful (fake) documents to support it.

My idea is that we can replace formal due diligence with an informal one, run by those who know potential borrower in person. If you know someone personally, you can judge if he is a scammer or not, and most likely - a real scammer will not even go to you with this, as he knows that you know that he is a scammer. 

My idea is not about giving out referrals to anybody you're "in friends" on facebook. It's about to refer only those few who you know and trust in person. And I think it's a matter of giving people right incentive to on the one hand - be willing to get into and get benefits, and on the other - to choose wisely.

Your creating hype by saying you can weed out all scams. I said it is impossible to weed out all scams. You can weed out basic scams, but more advance ones will not work. This idea, is dead your promising too many things that effect each other.

Ok, I see what you mean. It's a misunderstanding, I didn't mean to claim that I can wipe out ALL SCAM AT ONCE and I don't intend to create a hype. Of course it's not possible to stop all scams neither with this, nor with classic formal due diligence process. If be realistic some scam will always be there, it's a scam/non-scam ratio that makes the difference.

Here is my grounding for the thing:
How do we stop scams in theory?
The only thing that really matters is how much it worth to run a scam comparing to the output of scam itself. I.e. the net profit of scam is what is really important. In case of formal due diligence to create successful scam you need to trick due diligence auditors with stolen of fake documents, cleverly crafted legend etc. Depending on auditors experience and thoroughness it can be hard or easy (expensive or cheap). If it's cheap, assuming same level of gross scam profit - net scam profit grows and invites more scams.

How do I stop scams in practice?
This is microlending, so gross scam profit has a top cap, assume fro example that no more than BTC50 loaned at once. Also assume that getting this kind of loan will require three other established respectable borrowers to support you, i.e. risk their reputation and future loan interests for you. How much effort is needed to trick three different people into this, if you don't know them at the beginning? How much effort and time it will take to persuade them to support you, starting from scratch? Does it worth the gross profit of BTC50? Generally this is not easy to measure, and depending on different situations, communities and countries scammer expenses will vary greatly.
In general I think it's possible to maintain scam costs high enough in the way I propose, in detail the swift balance between keeping scam costs high and honest borrowers hassle low will be found based on actual performance stats.

Of course the whole thing will not keep ALL scams away forever. But it will allow to maintain acceptable level of scam/non-scam ratio at lower costs than the formal due diligence.

PS: I've updated original post to make sure it's clear that I'm not claiming to weed out all possible scams.

[🏰 TradeFortress 🏰]

Interesting ideas.

[Peter Lambert]

It sounds like you are trying to recreate Ripple?

[alexykot]

It sounds like me you are trying to recreate Ripple?

Not really. Somebody actually pointed me about the similarity, but I don't see where this analogy is coming from. Ripple is a network of exchange gateways and an internal currency called "ripples". My thing is mainly about creating a trust network of actual and potential borrowers based on their personal relationships and offline agreements.
I don't really see much similarity, can you explain your point please?

------
Yes, I know about IOUs exchanged between the gateways and users, but that has nothing to do with microlending, it's just a mean of payments and exchanges. My thing is about exactly microlending, so it's a different application, and the only similarity as for me as that both are money-related services.

[Peter Lambert]

It sounds like me you are trying to recreate Ripple?

Not really. Somebody actually pointed me about the similarity, but I don't see where this analogy is coming from. Ripple is a network of exchange gateways and an internal currency called "ripples". My thing is mainly about creating a trust network of actual and potential borrowers based on their personal relationships and offline agreements.
I don't really see much similarity, can you explain your point please?

------
Yes, I know about IOUs exchanged between the gateways and users, but that has nothing to do with microlending, it's just a mean of payments and exchanges. My thing is about exactly microlending, so it's a different application, and the only similarity as for me as that both are money-related services.

Gateways let you move money into and out of the Ripple system, but there is more to it than that. For this discussion you can just ignore the XRPs altogether.

The way ripple is like your system is that people form a trust network and the IOU's are traded between users, not just between the user and the gateway.

Example: I am friends with Al and Bob, Al trusts me and I trust Bob. Al has a bitcoin, Bob needs a bitcoin. He talks to Al, who agrees to lend him the bitcoin if he sends the ripple payment with 5% interest. So in ripple Bob sends 1.05 BTC to Al, then Al sends 1 BTC to Bob's bitcoin address. Al ends up with 1.05 BTC/me and I have 1.05 BTC/Bob. My overall balance remains unchanged (I owe the same amount to Al as Bob owes to me), but they were able to leverage the existing trust relationships to make the loan.

[🏰 TradeFortress 🏰]

Except the problem with Ripple is it assumes all debt as equal. A $5 IOU from your bank is different form a $5 IOU from your best friend, even through you may trust them both.

[Peter Lambert]

Except the problem with Ripple is it assumes all debt as equal. A $5 IOU from your bank is different form a $5 IOU from your best friend, even through you may trust them both.

Then that is something you should keep in mind when you set up your trust lines. If you do not want your friend's debt rippling through you to your bank, all you need to do is make sure the only person you trust in that currency is the bank, and you can trust your friend in a different currency.

[hennessyhemp]

Ripple is a scam

Do not use it

EDIT:

My account was hacked...I did not write this...I have upgraded my password and am posting on as many threads as possible...watch your backs and consider a more secure password...standard shit no longer cuts it.

[Peter Lambert]

Ripple is a scam

Do not use it

I keep seeing people saying that with no arguments to back it up. How is it a scam? To keep things on topic: If it is a scam, how could one make a microlending platform not be a scam?

[chipug]

Ripple is a scam

Do not use it

I keep seeing people saying that with no arguments to back it up. How is it a scam? To keep things on topic: If it is a scam, how could one make a microlending platform not be a scam?

Here you go, http://ripplescam.org/

[alexykot]

oh wow, I've missed a few things in here in last two days

Ok, I don't want to argue if Ripple is a scam or not. I don't like Ripple because of some core assumptions in it's concept, but that has nothing to do with my concept.

So, yes, Ripple assumes trading of IOUs between random people via gateways or directly. In this narrow meaning it's completely same as bitcoin - it allows trading certain rather virtual tokens of value between entities via a public ledger and without any trust between the parties.

This has nothing to do with microlending.
Microlending is when a set of lenders gives money to a set of borrowers, and
a) each lender gives his money to multiple borrowers at once, spreading risks between as many borrowers as he can reach
b) the amounts lent are rather small and have a strict upper cap, keeping it apart from classic banking system
c) interest on the loans is paid
d) the system is not trustless, and there is no trust by default, trust between borrower and lender has to be established via due diligence

Ripple has nothing like that because
a) there is no risk attached (at least explicitly), so there is no need to spread it
b) there are no caps on the amounts exchanged
c) there is no interest involved
d) system is trustless, as the XPR exchange is maintained via trustless cryptosystem, and the XPR-fiat exchange happens offline and in person between exchange and gateway and there is no prerequisite trust needed between them to operate.

My concept is about replacing formal due diligence with something else, not about a system to exchange IOUs. These are just completely different things.

[alexykot]

However in fact I see a fundamental problem in my concept. It may not work in practice because there is a need at the same time:
a) for people to have tight personal relations and intensive personal monetary relations (personal borrowings, local business etc), without banks or other institutions involved. Only this way they will be able to judge confidently on each other.
b) for people to have understanding of modern financial instruments, understanding of long term planning, financial discipline and possible delayed consequences of their actions.

The a is not possible in the First World, people there rarely have direct monetary relations.
The b is not possible in the Third World, people there rarely have such understanding and long term plans.

So the a and b will never meet, and that's why this will not work. Unless there is a way to solve this that I've missed.

-------

There is the Second World between the First and the Third, but it will not work there either, because people there don't have neither a nor b.