What is Default Rate?

Default rate measures the percentage of loans in a portfolio where borrowers have failed to meet their repayment obligations. In DeFi credit protocols, this metric is crucial for assessing the actual risk and expected returns of lending pools.

Calculating Default Rate

Default Rate = (Total Defaulted Loans / Total Loans Originated) × 100

Can be measured by:

Number of loans
Dollar value of loans
Over specific time periods (annual, cumulative)

Default Rate Context

By Asset Class (Typical Ranges)

Prime consumer loans: 2-5%
Subprime consumer: 10-20%
SME lending: 5-15%
Trade finance: 1-3%
Emerging market: 8-15%

DeFi Credit Historical Performance

Pre-2022: Low defaults, mostly institutional
2022 Crisis: Significant defaults (Alameda, Orthogonal)
Post-2022: Improved underwriting, lower rates

Delinquency Rate: Loans past due but not yet defaulted
Recovery Rate: Percentage recovered from defaulted loans
Net Loss Rate: Defaults minus recoveries
Charge-Off Rate: Loans written off as uncollectible

Impact on Yields

Expected Return = Gross APY - (Default Rate × (1 - Recovery Rate))

Example: 12% APY with 5% defaults and 40% recovery = 12% - (5% × 60%) = 9% net return

Evaluating DeFi Credit Pools

Review historical default data
Compare to industry benchmarks
Consider economic cycle timing
Assess underwriting standards
Check for first-loss protection

Risk Mitigation

Protocols mitigate defaults through overcollateralization, junior tranches, insurance, and diversification across originators.

Default Rate