Crypto Lending | Dec 20, 2023

Image: Unsplash/Traxer

In 2023, the crypto sector witnessed a remarkable rebound in private credit, with a 55% increase since the start of the year

This resurgence is particularly notable given the backdrop of last year’s crypto crisis and the current environment of elevated interest rates. According to Bloomberg News, active private loans via digital ledgers have escalated to about $408 million as of November 28, 2023. This growth, tracked by RWA.xyz (See: Active loans value by procotcol), is significant though it still trails the near $1.5 billion peak of June last year and is a fraction of the traditional $1.6 trillion private credit market.

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Blockchain-based private credit offers lower borrowing costs compared to traditional credit, with some protocols charging less than 10%. This affordability, coupled with increased transparency and efficient liquidation mechanisms, makes blockchain-based credit increasingly attractive.

Industry Perspectives

Traditional private credit has been criticized for its opacity, as noted by Pimco and the European Central Bank. In contrast, blockchain protocols offer more transparency and faster liquidation processes, making them more appealing to borrowers and investors alike.

In the blockchain iteration of private credit, platforms including Centrifuge, Maple Finance, and Goldfinch facilitate the aggregation or provision of investor capital. Commonly, these protocols employ the Ethereum blockchain and stablecoins such as USDC, which are anchored to the US dollar’s value. Borrowers then access these funds, adhering to conditions embedded within smart contracts.

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These protocols adopt measures like loan structuring or backing loans with tangible assets, enhancing the trust of investors.  Data from RWA.xyz shows that consumer, auto, and fintech sectors are leading in blockchain-based private credit utilization, followed by real estate, carbon projects, and crypto trading.

Image: RAW.xyz

Outlook

The crypto industry still faces challenges, including banking access and the absence of a credit rating system in crypto lending. However, the industry is adapting, with platforms like Maple Finance and Goldfinch providing innovative lending solutions.  The 55% jump in private credit within the crypto sector in 2023 shows the sectors resilience and adaptability.

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• Source: https://ncfacanada.org/blockchain-private-credit-grew-55-in-2023/