What is Private Credit?
Private credit refers to loans made by non-bank lenders directly to companies or individuals. Unlike traditional bank loans or public bonds, private credit deals are negotiated directly between lenders and borrowers, often with customized terms and higher yields.
Private Credit in DeFi
Blockchain technology enables private credit to be tokenized and distributed to on-chain lenders. DeFi protocols act as intermediaries, connecting institutional borrowers with crypto-native capital through transparent, auditable smart contracts.
How On-Chain Private Credit Works
- Borrower onboarding: Credit assessment and KYC/AML verification
- Pool creation: Smart contract pool for specific loan or borrower type
- Lender deposits: Users supply stablecoins to the pool
- Loan disbursement: Funds transferred to verified borrowers
- Repayment: Principal and interest flow back to lenders
- Default management: Collateral liquidation or recovery process
Types of On-Chain Private Credit
- Asset-backed lending: Loans secured by receivables, inventory, or equipment
- Revenue-based financing: Advances against future revenues
- Trade finance: Short-term loans for import/export
- Consumer credit: Fintech lending in emerging markets
- Real estate bridge loans: Short-term property financing
Key Protocols
| Protocol | Focus Area | TVL | Typical APY |
|---|---|---|---|
| Maple Finance | Institutional credit | $100M+ | 8-12% |
| Centrifuge | Asset-backed | $250M+ | 6-10% |
| Goldfinch | Emerging markets | $100M+ | 10-15% |
| Credix | Latin America | $50M+ | 10-14% |
| TrueFi | Corporate credit | $50M+ | 8-12% |
Risk Factors
- Credit risk: Borrower may default on obligations
- Undercollateralization: Loans often not fully backed
- Illiquidity: Lock-ups during loan terms
- Operational risk: Reliance on off-chain enforcement
- Concentration risk: Exposure to specific sectors or geographies
Why Yields Are Higher
Private credit offers premium yields (8-15%) compared to treasuries (5%) because lenders take on credit risk, accept illiquidity, and provide customized financing that banks often avoid.