The private credit market in the blockchain sector has rebounded, with a growth of 55% year-to-date.

Zhitong App has learned that according to statistical data, an increasing number of companies are seeking financing through blockchain-based private lending in a world of rising interest rates, which has led to a partial recovery of the industry that experienced a sharp decline during the cryptocurrency crisis last year.

According to data from the debt tracking platform RWA.xyz, active private loans through digital ledgers have grown by 55% since the beginning of 2023, reaching approximately $408 million as of November 28th. However, this is still below the peak of nearly $1.5 billion in June last year and only represents a small portion of the booming $16 trillion traditional private lending market.

Although borrowing costs vary depending on the transaction, according to data from RWA.xyz and private lending institutions, fees for some blockchain protocols are less than 10%, compared to double-digit rates sought by traditional credit providers in the current environment.

Advocates of digital ledgers argue that they make transactions and repayments transparent, as blockchain is open to public scrutiny, and software known as smart contracts can monitor stress and automatically recover loans or collateral.

Agost-Makszin, co-founder of alternative investment management group Lendary (Asia) Capital, said, "The increased transparency on the blockchain and the reduction of settlement mechanisms have lowered loan risks. This could result in lending rates lower than those of traditional private lending, which typically have slower lending speeds and longer settlement processes."

For a long time, bond giant Pacific Investment Management Company (PIMCO) and institutions such as the European Central Bank have considered traditional private lending to be too opaque. Since 2015, the industry has doubled in size, providing loans to small businesses, acquisition financing, real estate, and infrastructure.

In contrast, in the field of blockchain-based private lending, decentralized open-source financial platforms such as Centrifuge, Maple Finance, and Goldfinch can pool or provide access to investor funds, often using the Ethereum blockchain and stablecoins such as USDC pegged to the US dollar. Borrowers can use these funds based on the terms in the smart contracts.

The protocols can also take measures such as structuring loans or using real-world asset-backed loans to enhance investor confidence. According to RWA.xyz data, consumer, automotive, and fintech industries account for the majority of active loans in terms of value, followed by real estate, carbon projects, and cryptocurrency trading.

Sidney Powell, co-founder of Maple Finance, said, "We will attempt to use blockchain and smart contracts to manage loans, reduce costs more quickly, and provide funding for loans to gain a competitive advantage." A Rocky History

Maple Finance was one of the digital asset institutions that suffered from the $1.5 trillion cryptocurrency crash last year. This collapse led to a series of bankruptcies, including Sam Bankman Fried's FTX empire, and destroyed leveraged positions in the cryptocurrency ecosystem.

The crash dealt a blow to the concept of cryptocurrency lending, causing losses in the so-called decentralized lending projects in the digital asset space. According to DefiLlama data, the total value of decentralized lending has increased by 120% so far this year, reaching approximately $22 billion, but it is still far below the historical high of $54 billion set in April 2022.

The digital asset industry is recovering from last year's turbulence, but there are also other issues, such as uneven access to banking services, with banks taking a cautious approach to the role of cryptocurrencies in illegal activities. This suspicion complicates the task of converting between digital tokens and fiat currencies. Due to the relative novelty and complexity of blockchain, traditional finance is also uncertain about digital ledgers and potential security risks.

Tom Wan, a researcher at digital asset fund provider 21.co, said another obstacle is that unlike traditional finance, the crypto lending market lacks a credit rating system, which hinders a full understanding of risks.

Receivables Financing

However, trading activity is still recovering. In early 2023, Maple Finance and AQRU enabled Intero Capital Solutions LLC to initially obtain $3 million in stablecoins from a blockchain-based credit pool. Later this year, Goldfinch provided $1.35 million in stablecoins to Singapore fintech company Fazz, marking its first redeemable loan (allowing lenders to request repayment of principal on a regular basis).

Tom de la Rue, co-founder of Intero, which specializes in receivables financing and uses US federal tax refunds as collateral, said the transaction allowed the company to "quickly access funds at favorable loan rates in a stable, transparent, and predictable trading environment, which is not always the case in the private credit market."

Charlie You, co-founder of RWA.xyz, said one difference between blockchain-based private credit and traditional non-bank lending is that the former includes more fixed-rate products, while the latter is typically variable. He added that digital ledgers can reduce the manual back-office work that could increase costs.

You said, "Some of these cost savings will be passed on to issuers. It also allows for the issuance of smaller bonds, which is not possible in traditional ways, especially in complex financing structures."

However, whether private credit will flow extensively on the blockchain remains an open question. While tokenization - creating digital assets that represent real-world assets - may lead to more loan collateral, it largely depends on whether the crypto industry can repair its damaged reputation.