Review of Constant: a borderless, block-chain based P2P lending platform

Review of Constant: a borderless, block-chain based P2P lending platform

By ktn699 | Miscellaneous | 20 Oct 2019


Disclosures:

Publish0x contains a wealth of articles about emerging blockchain and cryptocurrency technologies, but there are often clear conflicts of interest in reviews, testimonials, informational pieces. This article has not been sponsored or incentivized by any outside corporation or private interest. I do not hold equity in the Constant nor am I an employee of Constant. My experience and knowledge of the platform stems from carefully perusing the website, following the community channel on telegram, and offering microloans (~100 USD) to borrowers on the platform. My only motivation is to inform my audience and garner tips for well-written and informative articles.

What is Constant?

Constant (aka myconstant.com) is a peer-to-peer lending marketplace that connects lenders and borrowers from around the world. It utilizes smart contracts to underwrite loans with cryptocurrency as collateral. For lenders who do not wish to lend directly to a single borrower, Constant converts their fiat deposits into stable coins that are then added to the Compound.finance liquidity pool for a 5.0% APY return. This latter mechanism is essentially a money market account, with unique risks and rewards, both of which I will detail later.

How does it work? 

Lenders deposit fiat currency and have two options:

1) Lend their money directly to a borrower 

2) Lend their money to the Compound.finance money market.

For direct loans (#1), lenders can determine the date of loan maturity and APR. This offer is then placed on the Constant marketplace and matched with a borrower who agrees to similar terms. The platform will attempt to match borrowers who are willing to accept the same APR and maturity date, however a shorter maturity date may be matched. As of the writing of this review, most loans successfully matched at 8-12% APR and 30 to 180 day terms. Interest is compounded continuously, but paid to the lender at the end of the loan term.

Borrowers must deposit one of several supported cryptocurrencies as collateral in an escrow wallet managed by a Constant smart contract. The value of that crytpo-currency must be equal to 150% value of the loan. If the borrower fails to repay the loan at the maturity or if the collateral depreciates to less than 110% of the loan value, it is liquidated on the open market and used to pay back the lender. 

For Compound.finance lending (#2), users simply deposit fiat to be held by Constant. Constant then converts this to stable coin that is lent to  the Compound.finance money market and earns interest that is compounded continuously. Lenders on Constant can withdraw their investment in Compound at any time. On Compound, money is pooled with many other investors and loaned to many different entities, thereby reducing the risk of losing their entire investment. However, this comes at the cost of lower rate of return than direct lending (~5.0%, when done through Constant). 

How does Constant make money? 

This is probably the most important part of the review. There is no such thing as a free lunch - thus, I am always suspicious of platforms that do not have a clear path to making money. Constant charges a fee of %1 of the loan value for matching borrowers to lenders. Borrowers pay this fee. Lenders do not incur any costs. Constant also skims a percentage off the interest payment from supplying currency to the Compound.finance money market. A brief inspection of the Compound.finance market suggests that interest yields are closer to 6-7%. Therefore, Constant is likely taking 1-2% and passing along 5% to users. Withdrawal fees and smart contract fees (gas fees) are paid by Constant.

What are the benefit?

For lenders, Constant has an improved risk mitigation mechanism than historic P2P lending approaches, where loans could not be collateralized and the creditworthiness of brorrowers depended on community reviews, third party vetting, or pure faith. How does a lender in the E.U. collateralize a micro loan to a poor farmer in rural Bangledesh? Platforms like Kiva essentially expected lenders to take on all the risk and view it as charity. This fit Kiva's social mission, but for lenders focused on the bottom line (ROI), this was an unacceptable risk profile. But with cryptocurrency-based underwriting of loans, lenders can have more assurance that some if not all of their principal and perhaps even some of the due interest can be recovered if borrowers default. This is an important mechanism for individuals looking to explore P2P lending.

For borrowers, Constant is a great way to simultaneously maintain their liquidity and exposure to cryptocurrency. Given the extreme day-to-day volatility of cryptocurrencies, borrowing fiat against cryptocurrency allows a great mechanism for paying for day to day expenses, leveraging into other investments, or even hedging against extreme downturns in the underlying cryptocurrency asset (warning - the latter two moves are advanced and may be trickier and riskier than they seem).

What are the risks?

For lenders, the risk of any P2P lending has always been losing your principal and interest income. This will never change. You will never have the same risk mitigation abilities as large institutional lenders (credit checks/scores, income statements, tax returns, physical collateral, liens against vehicular or property titles. In the above section, I have described how cryptocurrency collateralization (direct lending) and asset pooling (Compound.finance lending) helps to lower the risk for lenders.

However, lenders must understand how volatility affects the cryptocurrency collateral. If a cryptocurrency collateral decreases in value below 110% of the loan value during the term of the loan, the smart contract will automatically liquidate the collateral (sell the collateral on the open exchanges) to pay back the principal and interest to the lender. However, between initiation of liquidation and settlement on the market, the collateral may decrease even further in value, thus potentially returning less than the total amount due to lender. Please recognize that this means the lender will lose SOME or ALL of their principal plus the time value of their money (interest). I have personally seen records of this happening to other lenders. This mechanic has some unique implications that need to be addressed. First, interest above 10% APY is especially at risk for non-payment, as liquidated collateral will cover at most 110% of the loan value. Secondly, lenders must consider the nature cryptocurrency volatility when determining a suitable loan term. I personally do not loan money for more than 60 days at a time.

The same collateral liquidation mechanism presents risks to borrowers. Essentially, if the value of cryptocurrency decreases from its initial value of 150% of the loan to 110% of the loan, it will be immediately liquidated and paid out to the lender. This will effectively eliminate the borrower's exposure to the cryptocurrency. Thus, borrowers must keep in mind their expectations for the cryptocurrency collateral over the term of the loan. If it is not expected to do well, the borrower may lose that collateral to liquidation. However, a borrower might also turn this mechanism to their advantage. They can effectively take fiat loans out against their cryptocurrency to hedge against a massive downturn (>40%). 

Finally, there are systemic risks that must be addressed. Platform failure, platform fraud, or smart contract coding bugs can all lead to loss of funds for borrowers and lenders. Though my interaction with a number of lenders on the Telegram group for Constant has offered been generally positive, I have heard gripes of occasional delays in withdrawing cryptocurrency or fiat. In about 1 month, I will begin to make my first withdrawals, and provide an update.

What can be improved?

My biggest gripe about Constant is the lack of transparency of collateral value. I have suggested the following to the Constant community, including customer relations admins:

1) Audit of the smart contract code by an external organization.

2) Lenders should have access to the public address of collateral wallets to evaluate the value and adequacy of collateral before agreeing to a loan. It seems that only borrowers can view the collateral wallet. 

3) Lenders should have the ability to limit their lending to borrowers from certain geographic jurisdictions. Lenders should also have access to their borrower's history of loans as this is an important predictor of future creditworthiness.

I hope to see these changes in the future! As always, I welcome your thoughts, suggestions, and questions. 

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(Cover image by Johny vino; used with permission from Unsplash.com)

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ktn699
ktn699

Writer and technology enthusiast. Here to have fun and learn a thing or two.


Miscellaneous
Miscellaneous

Musings on random topics - mostly finance and technology related.

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