Karma – Decentralized Lending Without Borders
Traditional banking brings borders, regulations and limitations, but the P2P lending platform completely changes the concept of this financial sector. But how does P2P lending achieve the goal of borderless loans? Karma has the answer with decentralized lending without geographic borders.
The core of the Karma ecosystem are the people who live in the different areas of the world, making cross-border operations essential to this platform. Karma gives the ability for the P2P exchange of assets between citizens and legal entities from various countries. There is a strong need for this as there are countries with cheap money (negative deposits, negative mortgage rates) and countries with expensive money (high-interest rates on loans). There are obvious shortcomings when applying cross-border exchange rates and services.
Users who have used the international payments option have met with many challenges. Banks need references and documents when transferring even small amounts of money. Karma has found a solution to this issue by automating and simplifying the process.
P2P platforms aren’t new on the scene when it comes to lending. For instance, Kiva, founded in 2005, is a non-profit organization which enables people to lend money to low-income entrepreneurs and students. This project has been successful by reaching to over 80 countries and the system has been operating within the legal arena for many years.
There are different options when transferring cross-borders. When transferring in fiat currency, transfers take place through an escrow account in a bank connected to the Karma application using their application program interface (API). The application automatically recognizes which payment is connected which c contract and what kind of payment it is: an investment or a loan repayment.
The other version of cross-border transfers are fiat – crypto asset – fiat. Right now the transactional costs in process are a lot higher than with fiat transfers. This operation, too, will be connected to the ecosystem of Karma.
Another important point of Karma’s cross-border function is the decentralization of competencies to various countries of presence. Banks, investment funds, P2P-platforms usually operate inside the same region because they don’t have capabilities in other areas. Karma platform offers a model which enables to create a community of experts who would be accessible in any country.
Insuring against the currency risk is the other feature of cross-border lending. It’s suggested to give out loans in the currency in which the borrower earns, though, the rate of this currency can rise or fall in relation to the exchange rate favored by the investor.
In the early stages of Karma, a separate fund for insuring risks for investors will be created. The fund will accumulate funds to cover risks against currencies and reinsure them from large players or hedge in open markets. The cost of currency insurance will be per market and individual for each currency pair. The investor has the option whether or not to choose to pay for currency insurance, and investors can choose the most favorable conditions from all of the options.