What is a Credit Protocol?
A credit protocol is a decentralized platform that connects lenders with borrowers, enabling the creation and management of credit markets on-chain. Unlike overcollateralized DeFi lending (Aave, Compound), credit protocols often extend undercollateralized loans to verified borrowers based on creditworthiness rather than just collateral.
How Credit Protocols Work
- Borrower application: Entities apply with business details and credit history
- Due diligence: Protocol or delegates assess creditworthiness
- Pool creation: Lending pool established for approved borrower
- Lender deposits: Users supply stablecoins to earn yield
- Loan disbursement: Funds released to borrower off-chain
- Repayment: Principal and interest returned per schedule
- Default handling: Recovery procedures if borrower fails
Types of Credit Protocols
Institutional Credit
- Large loans to crypto-native firms
- Examples: Maple, TrueFi (institutional pools)
Asset-Backed
- Loans secured by real-world receivables
- Examples: Centrifuge, Goldfinch
Unsecured/Reputation-Based
- Loans based on borrower track record
- Examples: TrueFi, Atlendis
Major Credit Protocols Comparison
| Protocol | Focus | TVL | Yield Range |
|---|---|---|---|
| Maple | Institutional | $100M+ | 8-12% |
| Centrifuge | Asset-backed | $250M+ | 6-10% |
| Goldfinch | Emerging markets | $100M+ | 10-15% |
| TrueFi | Corporate | $50M+ | 8-12% |
| Credix | LatAm | $50M+ | 10-14% |
Key Participants
- Lenders: Supply capital to earn yield
- Borrowers: Vetted entities seeking capital
- Pool delegates: Assess credit and manage pools
- Stakers: Back loans with first-loss capital
- Oracles: Provide off-chain data verification
Risk Management Features
- First-loss capital: Stakers absorb initial losses
- Pool diversification: Multiple borrowers per pool
- Credit assessment: Off-chain due diligence
- Loan covenants: Contractual restrictions on borrowers
- Default recovery: Legal claims on borrower assets
Yields vs Risk
Credit protocols offer higher yields (8-15%) than treasury products (5%) because:
- Credit risk of borrower default
- Illiquidity during loan terms
- Operational complexity
- Smaller, less established protocols
Due Diligence for Lenders
Before depositing, consider:
- Protocol track record and historical defaults
- Borrower diversity and concentration
- Legal jurisdiction and enforcement
- First-loss coverage percentage
- Loan term and liquidity constraints