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Idea: Peer-to-Peer Lending / Crowdfunding
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Coreth Setann
Caldari Provisions
Caldari State
#1 - 2011-09-17 17:26:18 UTC  |  Edited by: Coreth Setann
I've been looking at the loans/financing market in EVE and to me, the biggest problems seem to be:


  • the very high rate of default/fraud
  • the amount of time required to invest in auditing/background checks makes the "minimum" loan amount very large, and limited to only one or a few financiers per project... which means the amount loaned by each financier is very large, which increases their personal risk

I propose a peer-to-peer/crowdfunding scheme to work around both dangers.

By pooling your funds into financing multiple loans, the risk of default/fraud becomes more like an operating cost that can be averaged out, rather than a very high personal risk for the average lender.

From that, it also makes applying for credit easier, especially for both small and very large amounts.

A company would run the lending service (probably as a website) which would allow players to register (after verifying they control the character involved). Players could specify the terms of the loan they would like, interest rate, term, an overview of purpose for what the loan is for, supporting documentation on why they would be reliable, etc.

Lenders would transfer their funds to the company account, and then be able to fulfill the entire loan, or, importantly, only part of the loan. Multiple investors could fund the loan.

50 investors each committing 10 mn ISK to ten different loans still raises 5 bn ISK in capital, but the individual risk of a single default is much lesser to each investor.

With a high enough interest rate and a managed default/fraud rate, defaults can much more easily absorbed as a cost of business.

In theory, I imagine this could be expanded to accepting collateral that would be liquidated in the event of failure to repay, though that'd involve much more activity on the part of the operating company.

And of course, it'd be profitable by taking a small cut of the interest.

The main problem I foresee is this would depend on a central entity. However the "cooking the books" and faulty investment problems (such as what happened with eve bank) are lessened since the investors directly choose what to fund, rather than the operating company's management. With open books this shouldn't be as problematic.

It'd still be vulnerable to straight-up "take the money and run" heists, of course.

Thoughts?
Chevalleis
The Scope
Gallente Federation
#2 - 2011-09-17 18:28:52 UTC
To get a reasonable profit from an investment, one would have to invest significantly more than 10m (at least a full-time or even part-time investor would) And when there's more and more investors, the amount of money the operating company controls would rise to very high numbers, thus increasing the risk of a theft. The general rule of thumb is that the more money there's involved, the more probable is the chance of a heist, leaving the investors butthurt. One option of course would be to have the money divided between many regognized (and rich) MD characters, so that the temptation of running away with the money decreases. Bit (just a little) like T4U, except without the possibility of blueprint release. This way, unless the conspirators were right and all the famous MD personas are infact owned by one holder, the only things left to worry about would be finding some willing people for the job and figuring out how to direct the ISK from investors to the moneyholders without having a corporation or such as a stumbling block.
Florestan Bronstein
Ministry of War
Amarr Empire
#3 - 2011-09-17 18:41:24 UTC
you pool to mitigate away variance in investment outcome and introduce a new single point of failure at the same time...
NoNah
Hyper-Nova
#4 - 2011-09-17 19:16:08 UTC
This is how every single IPO and bond works, assuming they have more than one investor. The only difference is that you propose another middleman whom as above poster pointed out is another possible point of failure. Ironically this would be the opposite to peer-to-peer, it would be distributed yes, but not peer-to-peer.

As is the workload and ALL the risk relies in the investee. And the frequency of failures wouldn't decrease(investing 10 mil in 500 loans all with 75% risk is no different from investing 500 mil in 10 loans with 75% risk) There's already no issues in obtaining a loan as long as you somehow can motivate it, and if you can't collateralize it. I'm afraid I just can't see the advantage to your model.
Florestan Bronstein
Ministry of War
Amarr Empire
#5 - 2011-09-17 19:20:17 UTC
NoNah wrote:
As is the workload and ALL the risk relies in the investee. And the frequency of failures wouldn't decrease(investing 10 mil in 500 loans all with 75% risk is no different from investing 500 mil in 10 loans with 75% risk)

Most of us tend to be risk-averse and don't just look at expected value but also at variance.
NoNah
Hyper-Nova
#6 - 2011-09-17 20:18:51 UTC
Florestan Bronstein wrote:
NoNah wrote:
As is the workload and ALL the risk relies in the investee. And the frequency of failures wouldn't decrease(investing 10 mil in 500 loans all with 75% risk is no different from investing 500 mil in 10 loans with 75% risk)

Most of us tend to be risk-averse and don't just look at expected value but also at variance.


While true, I'm not sure how it contradicts the quote?

Regardless of what the investment is about, there is some level of risk involved. As long as that risk is equivalent throughout the investment options the actual content of it is somewhat irrelevant for my point at least. Staying on a coarse-grained level all investments will be about someone recieving isk from someone else after having supplied sufficient motivation to it. Wether his main input is promised returns, accumulated reputation(which really is nothing but another form of collateral), some combination there of or whatever doesn't really matter.
egola
NSFW federation
#7 - 2011-09-18 02:20:46 UTC  |  Edited by: egola
this sounds like an investment BANK (oh @#$! the taboo word)

we've already had funds just like this on MD not too long ago(forgot his name bah!) overall while the risk might be less for each individual person, the rewards will also be ridiculously low as well. (sure losing 10m might not be as bad as losing 100m but gaining 1m instead of 10m sorta makes the fund pretty pointless as an income)
Navarre Fuego
Gaston Mining and INdustrial
#8 - 2011-09-18 10:24:38 UTC
Perhaps the billing aspects of this thread would control some of the defaulting issues associated with the concept of loans. Indeed, the idea of contracting shares would also be a way of "investment banks" funding small corporations.
Coreth Setann
Caldari Provisions
Caldari State
#9 - 2011-09-18 13:51:52 UTC
egola wrote:
this sounds like an investment BANK (oh @#$! the taboo word)

we've already had funds just like this on MD not too long ago(forgot his name bah!) overall while the risk might be less for each individual person, the rewards will also be ridiculously low as well. (sure losing 10m might not be as bad as losing 100m but gaining 1m instead of 10m sorta makes the fund pretty pointless as an income)


Well the idea is you'd still invest 10 bn or whatever, but across multiple loans, and much more easily so. Thus the risk of default can be managed for the typical investor.
Sh0plifter
Underworld Property Accounting Partnership
#10 - 2011-09-18 22:55:13 UTC
For something like this you would need to take in a large sum of isk to even get investors interested to spread the isk across multiple people. 10-50b max for 10+ loans isn't enough profit to take up 11+ risks. At least in my opinion.
Thermik
Energaic Mining
#11 - 2011-10-22 21:57:25 UTC
Sounds like this has all the risks, and none of the benefits, of your standard player run EVE lottery. At least some of those are backed with collateral.