What is Private Credit?
Private credit refers to loans extended by non-bank lenders directly to companies. In the DeFi context, private credit protocols tokenize these loans, allowing crypto investors to fund real-world businesses and earn yields from interest payments.
How Private Credit Works in DeFi
- Borrower Onboarding: Businesses apply for credit through the protocol
- Underwriting: Loan terms, collateral, and creditworthiness are assessed
- Pool Creation: A lending pool is created for the specific loan or borrower
- Investor Deposits: DeFi users deposit stablecoins into the pool
- Loan Disbursement: Funds are converted to fiat and sent to borrowers
- Repayment: Interest and principal flow back to token holders
Types of Private Credit in DeFi
- Revenue-Based Financing: Loans repaid from business revenue
- Invoice Factoring: Advances against outstanding invoices
- Trade Finance: Funding for import/export transactions
- Equipment Financing: Asset-backed business loans
- Real Estate Loans: Bridge loans and development financing
Major Private Credit Protocols
- Maple Finance: Institutional undercollateralized lending
- Goldfinch: Emerging market business loans
- Centrifuge: Tokenized real-world asset pools
- Credix: Latin American private credit
- TrueFi: Institutional credit lines
Yield Characteristics
- Typical yields: 8-15% APY
- Higher than tokenized treasuries due to credit risk
- Usually denominated in stablecoins
- Lock-up periods may apply
Risks
- Default Risk: Borrowers may fail to repay
- Illiquidity: Positions may be locked during loan terms
- Off-chain Dependencies: Relies on legal enforcement in traditional courts