Companies increasingly turn to blockchain-based private credit for financing amidst higher interest rates, marking a resurgence in a sector that faced a downturn during last year’s crypto crisis.
Digital ledger-based active private loans have surged by 55% since the beginning of 2023, reaching approximately $408 million as of November 28, according to RWA.xyz, a platform monitoring such debt. Although this figure lags behind the near $1.5 billion peak seen last June, it remains a fraction of the expansive $1.6 trillion traditional private credit market.
Compared to traditional providers seeking double-digit rates in the current financial climate, certain blockchain protocols charge less than 10%, showcasing varying borrowing costs on individual deals, as outlined by RWA.xyz and private-credit lenders.
Advocates of digital ledgers highlight their ability to make deals and repayments transparent due to the open nature of blockchains. Smart contracts, a type of software, monitor stress and autonomously recall loans or collateral.
According to Agost Makszin, co-founder of Lendary (Asia) Capital, the increased transparency and liquidation mechanisms onchain have mitigated lending risks, likely resulting in lower borrowing rates compared to the traditionally slower and longer liquidation process of traditional private credit.
Traditionally, private credit has faced criticism for its opacity from entities like bond giant Pimco and the European Central Bank. While the industry has significantly expanded, providing loans for diverse sectors like smaller companies, buyouts, real estate, and infrastructure, investors are increasingly seeking exposure to this asset class.
In the blockchain version, protocols such as Centrifuge, Maple Finance, and Goldfinch pool or offer investor funds using platforms like the Ethereum blockchain and stablecoins such as USDC, tied to the dollar. Borrowers access these funds under conditions outlined in smart contracts.
To reinforce investor confidence, protocols structure loans or use real-world assets as collateral. RWA.xyz data reveals that consumer, auto, fintech, real estate, carbon projects, and crypto trading form the majority of active loans by value.
Maple Finance’s co-founder Sidney Powell emphasizes leveraging blockchain and smart contracts to manage loans efficiently, reduce costs, and expedite funding for a competitive edge.
