Blog Getting started Risk and our P2P lending platform: what you should know

Risk and our P2P lending platform: what you should know

date July 24, 2019 time 3 min read 616 views

“How do you protect me from risk?”

It’s a fair question, and one of our most common.

To answer it, I’ll take you deep into our operations to get a better understanding of the mechanics of our platform as well as the safety measures we include to protect you.

But before we start, please remember that no business, no matter how diligent, can remove every conceivable risk. We can, however, take measures to mitigate those within our control, as you’ll discover below.

How we protect investors from peer to peer lending risks

Borrower default and collateral devaluation

When investing with MyConstant, you’re lending your money to an overcollateralized borrower. In other words, someone who has staked at least 150% of the loan value in cryptocurrency. If they default on the loan or their collateral value falls to 110% of your principal plus earned profit, we sell the collateral to repay you and protect your investments.  

Now, this only works if we can sell that collateral quickly enough, otherwise the proceeds might not cover your principal and earned profit. Therefore, we cap each collateral type by trading volume and liquidity. This minimizes the chances of us being unable to sell collateral, but it can’t guarantee a successful sale.

Our exchange partner might go down, for example, or network congestion could slow transactions. However, these are very minor risks — there are hundreds of exchanges to choose from, and network congestion has yet to prove an issue. Whatever happens, we’ll continue trying to sell the collateral to repay you. 

It’s worth remembering that cryptocurrencies can be sold at a moment’s notice under most conditions, making them ideal for short-to-medium term investment. Property, on the other hand, which is common among other P2P lending platforms, is more problematic. You’d wait months or even years for your money back, and liquidation thresholds are too impractical to implement.

Custodial risk

MyConstant is designed to be non-custodial. This is why when you wire your funds, the money is sent directly to our custodial partner, Prime Trust. Once there, your money is stored across multiple FDIC-insured bank accounts, with combined coverage of $130 million dollars.

When your money is in Prime Trust, it’s FDIC insured. However, once instant access is activated — or if you invest in a fixed-term loan — your money goes into a liquidity pool managed by investors on MyConstant. The collateral that borrowers put up act as a safety net for your investments.

Should a borrower default, his or her collateral is quickly liquidated to repay the loan.

How we help borrowers mitigate risk

Your collateral 

In order to borrow on our platform, you need to secure a loan with cryptocurrency collateral. This gives our investor the confidence to lend you their money. If you default (fail to repay), we’ll sell your collateral to repay the investors. Similarly, if the value of your collateral falls to 100% of your investor’s principal and earned profit, we’ll also sell it. 

Here’s how collateral protection works for borrowers on MyConstant. As cryptocurrency is a volatile asset, we ask you to put up to 200% of the loan amount in your chosen cryptocurrency to give you some leeway should the value fall. Selling your collateral is always a last resort, and we’ll let you know if you approach the liquidation threshold. In fact, we warn you three times:

  • Once at 125% of the investor’s principal and earned profit.
  • Again at 120% of the investor’s principal and earned profit.
  • And finally at 115% of the investor’s principal and earned profit. 

This gives you three opportunities to top up extra collateral and avoid a sale. But please keep an eye on your loan during the term as these warnings might reach you too late in a flash crash.  

Custodial risk 

As mentioned previously, we currently use Prime Trust to escrow your funds when instant access is disabled.  But when it comes to the collateral you send when placing a borrow order, things are a little different.

When you borrow on MyConstant, 30% of your crypto collateral is stored in a third party wallet — ready to be liquidated in case your collateral falls below the 110% threshold or if you recall excess collateral.

The remaining 70% of your crypto is stored in MyConstant hot wallets hosted on a dedicated server that’s insured up to $10 million dollars. Only qualified senior staff members have access to these wallets. Occasionally, we’ll move collateral to cold storage, but it depends on the loan term and other operational factors. 

Assess your tolerance for risk

Risk is everywhere. It’s part of life. Choosing which risks to tolerate and which to avoid can get a little complicated. And while we can’t make that decision for you, we can make it easier by being transparent. I hope that’s enough to help you decide to give us a try, and if you have any other questions, please drop us a line at [email protected] or send us a message on Telegram.    

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Chris Roper

Chris Roper

Communications Manager

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