How to Earn on Private Credit

How to Earn on Private Credit in DeFi

Private credit protocols offer some of the highest yields in DeFi (8-18% APY) by connecting crypto capital with institutional borrowers. Unlike treasury-backed products, private credit involves real credit risk - the chance that borrowers may default. This guide provides a comprehensive approach to evaluating and investing in private credit opportunities.

Understanding Private Credit Risk

Before investing, understand what drives private credit yields:

Credit Risk:

Borrowers may fail to repay. Default rates historically range 1-5% but can spike during economic stress.

Recovery Risk:

If default occurs, how much can be recovered? Secured loans recover more than unsecured.

Concentration Risk:

Exposure to single borrowers, industries, or geographies increases volatility.

Liquidity Risk:

Many positions have lock-ups or withdrawal queues. You cannot exit instantly.

Currency Risk:

Emerging market loans may have exposure to local currencies.

Higher yields compensate for these risks. Only invest what you can afford to lose.

Due Diligence Checklist

Before investing in any private credit pool, evaluate:

Borrower Assessment

• [ ] Who is the borrower? Research their business and track record
• [ ] What is their repayment history on this protocol?
• [ ] What is the loan purpose? Is it sensible business use?
• [ ] Are there audited financials available?
• [ ] What is the borrower's credit rating (if available)?

Loan Terms

• [ ] What is the interest rate? Is it fixed or variable?
• [ ] What is the loan duration?
• [ ] Is the loan secured or unsecured?
• [ ] What collateral backs secured loans?
• [ ] Are there covenants or performance triggers?

Pool Structure

• [ ] Is there tranche structure (senior/junior)?
• [ ] What is the first-loss buffer?
• [ ] How are defaults handled?
• [ ] What is the pool diversification?
• [ ] Who manages the pool (if applicable)?

Protocol Assessment

• [ ] How long has the protocol operated?
• [ ] What is the total origination history?
• [ ] What is the historical default rate?
• [ ] Are contracts audited?
• [ ] Is there insurance or reserve fund?

Liquidity Terms

• [ ] What is the lock-up period?
• [ ] How do withdrawals work?
• [ ] Is there secondary market liquidity?
• [ ] What happens during high redemption periods?

Protocol Deep Dives

Maple Finance

Focus: Corporate credit to institutions Yields: 8-15% APY Structure: Pool delegates manage underwriting History: $2B+ originations, experienced 2022 defaults, improved since Best For: Diversified corporate credit exposure How to Invest:

1. Complete KYC on Maple
2. Review available pools and pool delegates
3. Assess borrower composition
4. Deposit USDC to chosen pool
5. Monitor position and pool health

Goldfinch

Focus: Emerging market fintech lenders Yields: 8-12% APY Structure: Senior Pool (passive) and Backer Pool (active) History: Strong EM track record, some defaults in challenging markets Best For: Emerging market exposure with social impact How to Invest:

1. Complete KYC and UID verification
2. For beginners: Deposit to Senior Pool
3. For advanced: Evaluate individual deals as Backer
4. Monitor borrower updates and repayments

Centrifuge

Focus: Diverse RWA including real estate, trade finance Yields: 7-12% APY Structure: Tinlake pools with DROP (senior) / TIN (junior) tranches History: Long-running with MakerDAO integration Best For: Specific asset class exposure How to Invest:

1. Research available Tinlake pools
2. Choose asset class (real estate, trade finance, etc.)
3. Decide between DROP (safer) or TIN (higher yield)
4. Deposit DAI or USDC
5. Track pool performance and maturity

Clearpool

Focus: Institutional borrowers with dynamic rates Yields: 8-14% APY Structure: Borrower creates pool, rates adjust with utilization History: Growing with diversified borrower base Best For: Selecting specific borrowers How to Invest:

1. Complete verification
2. Research individual borrower pools
3. Check credit scoring and utilization
4. Deposit USDC
5. Monitor borrower health and rates

Building a Private Credit Portfolio

Diversification Strategy:

• Spread across multiple protocols
• Mix different borrower types and geographies
• Balance senior (lower yield, safer) and junior positions
• Limit any single borrower to 10% of allocation

Suggested Allocation by Risk Tolerance: Conservative:

• 70% Senior/passive pools
• 30% Junior/active pools
• Focus on established borrowers

Moderate:

• 50% Senior pools
• 40% Diversified junior
• 10% High-yield emerging market

Aggressive:

• 30% Senior pools
• 50% Junior pools
• 20% High-yield/emerging market

Monitoring Your Positions

Track these metrics regularly:

1. Pool Utilization: High utilization may signal stress
2. Default Rates: Watch for increasing defaults
3. Borrower Updates: Read protocol communications
4. TVL Trends: Declining TVL may indicate concern
5. Yield Changes: Sudden yield drops may signal issues

Red Flags:

• Missed payments without explanation
• Sudden borrower departures
• Large withdrawals from pools
• Protocol communication gaps

Exit Strategies

Plan your exit before entering:

Standard Redemption:

Most pools have weekly or monthly redemption windows. Check terms before depositing.

Secondary Market:

Some tokens (like Goldfinch FIDU) trade on secondary markets. Expect discounts during stress.

Maturity:

Some positions mature at specific dates. Plan around these.

Emergency Exit:

During stress, liquidity disappears. Do not count on emergency exits.

Track your private credit positions with Fensory. Monitor yields, maturities, and risk metrics across protocols. Explore Private Credit →