More companies are turning to blockchain-based private credit as they seek financing amid increasing interest rates, leading to a significant surge in this sector.
According to RWA.xyz, a platform that tracks debt, active private loans through digital ledgers have risen by 55% since the beginning of 2023, reaching approximately $408 million as of November 28th.
Although this figure is lower than the peak of nearly $1.5 billion reached in June of the previous year, it still represents a notable revival.
However, it should be noted that this amount is just a fraction of the $1.6 trillion traditional market for private credit.
One of the key advantages of blockchain-based private credit is the potential for lower borrowing costs.
While interest rates can vary depending on the specific deal, some blockchain protocols charge less than 10%, compared to the double-digit rates sought by traditional providers in the current market environment.
“Increased transparency and liquidation mechanisms onchain have reduced the risk of lending,” said Agost Makszin, co-founder of Lendary (Asia) Capital, an alternative investment management group, told Bloomberg.
“This has likely resulted in lower borrowing rates compared with traditional private credit, which is often slower and has a longer liquidation process.”
Traditional Private Credit Faces Criticism for Being Opaque
Traditional private credit has faced criticism for being too opaque, with concerns raised by industry players such as Pimco and the European Central Bank.
However, this sector has seen significant growth since 2015, providing loans for smaller companies, buyout financing, real estate, and infrastructure projects.
Investors are increasingly seeking exposure to this asset class.
In the blockchain version of private credit, protocols such as Centrifuge, Maple Finance, and Goldfinch facilitate pooling or providing access to investor funds.
These protocols typically utilize the Ethereum (ETH) blockchain and stablecoins like USD Coin (USDC), which are pegged to the dollar.
Borrowers can access funds through smart contracts, which codify the terms of the loan.
To enhance investor confidence, protocols can structure loans or collateralize them with real-world assets.
RWA.xyz data highlights that the consumer, auto, and fintech sectors account for the majority of active loans by value, followed by real estate, carbon projects, and crypto trading.
“We’ll try and leverage the fact that we use the blockchain and smart contracts to manage our loans, take out costs and fund loans quicker, to try and get a competitive edge,” said Maple Finance’s co-founder Sidney Powell.
Maple Finance, one of the blockchain-based lending platforms, faced challenges during last year’s crypto market downturn.
However, the industry has been recovering, with total decentralized lending reaching around $22 billion year-to-date, although still below the record high of $54 billion in April 2022.
Crypto Industry Faces Banking Hurdles
Despite the recovery, the digital asset industry faces hurdles such as limited access to banking services due to concerns over crypto’s involvement in illicit activities.
Shifting between tokens and fiat currency is also complicated, and traditional finance remains cautious about digital ledgers and potential security risks.
Additionally, the lack of a credit rating system in the crypto lending market hinders a comprehensive understanding of risks.
Nevertheless, activity is picking up in the blockchain-based private credit space.
Maple Finance and AQRU enabled Intero Capital Solutions LLC to access $3 million in stablecoins from a blockchain-based credit pool.
Similarly, Goldfinch provided its first callable loan of $1.35 million in stablecoins to Singapore-based fintech firm Fazz.
Callable loans allow lenders to demand principal repayment at regular intervals.