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Crypto Loans Back Up 55%: Will Lending Sector Reach New Heights in 2024?

Last Updated December 18, 2023 3:19 PM
Teuta Franjkovic
Last Updated December 18, 2023 3:19 PM

Key Takeaways

  • High-interest rates have fueled a surge in interest for blockchain-based private credit.
  • Blockchain lending volume has grown significantly in 2023, highlighting its potential for future disruption.
  • Concerns over security, transparency, and access remain hurdles for blockchain lending.

As companies seek financing amid high-interest rates, there’s a growing interest in blockchain-based private credit.

According to data from RWA.xyz , active private loans on digital ledgers have risen by 55% since early 2023, reaching around $408 million as of November 28.

Can Blockchain Borrowing Crack the Private Credit Colossus?

Despite the increase, the volume remains below the peak of nearly $1.5 billion  seen last June and is a small percentage of the traditional $1.6 trillion private credit market. Notably, some blockchain protocols offer borrowing rates below 10%, more favorable than to the double-digit rates often found in traditional private credit in the current economic climate.

Proponents of digital ledgers advocate their use for increasing transparency in deals and repayments, as blockchain technology allows for public scrutiny. Furthermore, they highlight the efficiency of smart contracts in these transactions.

Smart contracts can autonomously monitor financial stress and carry out actions like recalling loans or collateral, providing an added layer of security and efficiency in the lending process. This technological approach stands in contrast to traditional credit providers.

Agost Makszin , co-founder of Lendary (Asia) Capital, an alternative investment management group said :

“Increased transparency and liquidation mechanisms onchain have reduced the risk of lending. This has likely resulted in lower borrowing rates compared with traditional private credit, which is often slower and has a longer liquidation process.”

blockchain credit
Credit: RWA.xyz

Private Credit Faces Transparency Revolution

The traditional private credit sector, criticized for its opacity by entities like Pimco  and the European Central Bank , has trebled in size since 2015. This growth caters to diverse needs, such as loans for smaller companies, buyout financing, and real estate and infrastructure projects, attracting investor interest. In contrast, blockchain-based private credit, utilizing platforms like Centrifuge, Maple Finance, and Goldfinch, operates differently. These protocols pool or grant access to investor funds, often on the Ethereum blockchain, using stablecoins like USDC. Borrowers then access these funds under terms set by smart contracts, offering a potentially more transparent and structured approach .

Blockchain protocols are trying to boost investor confidence by structuring loans or securing them with real-world assets. According to RWA.xyz,  the majority of active loans are concentrated in the consumer, auto, and fintech sectors. These are followed by real estate, carbon projects, and crypto trading. Sidney Powell, co-founder of Maple Finance, proclaims the advantages of using blockchain and smart contracts for managing loans. By reducing costs and speeding up the funding process, they aim to gain a competitive edge in the market. The ideas it that the platforms use the efficiency and transparency offered by blockchain technology.

Crypto Lending Surges, But Access & Trust Issues Linger

Maple Finance was among the entities affected by last year’s significant downturn in the crypto market, which saw $1.5 trillion wiped out, impacting numerous businesses, including Sam Bankman-Fried’s FTX empire. This crash, which particularly hit leveraged positions in the crypto ecosystem, cast doubt on the viability of crypto lending. Despite these setbacks, the value in decentralized lending has rebounded by 120% year-to-date, reaching approximately $22 billion, as per DefiLlama . However, this figure is still well below the peak of $54 billion recorded in April 2022, reflecting ongoing recovery and adaptation within the sector.

As the digital-asset industry recovers from the previous year’s upheaval, it faces challenges. For instance, it has limited banking access due to concerns over cryptocurrency’s role in illegal activities. This skepticism makes it difficult to transition between tokens and fiat currencies. Additionally, there’s uncertainty in traditional finance about the security of digital ledgers, given their novelty and complexity. A significant hurdle, as pointed out by Tom Wan of 21.co, is the absence of a credit rating system in the crypto lending market. This hinders a comprehensive understanding of risks, a feature standard in traditional finance.

Blockchain Lending Bounces Back

Despite challenges, there’s been a notable uptick in activity within blockchain-based financing. In early 2023, Maple Finance and AQRU facilitated a deal for Intero Capital Solutions LLC, allowing access to $3 million in stablecoins from a blockchain credit pool. Later, Goldfinch provided a $1.35 million  callable loan in stablecoins to Singapore’s fintech firm Fazz. Intero, specializing in receivables financing, used US federal tax rebates as collateral, benefiting from a rapid, favorable loan rate and transparency that’s not always present in private credit markets, as highlighted  by co-founder Tom de la Rue.

The future scale of private credit flowing through blockchains remains uncertain. The potential for tokenization, which involves digitizing real-world assets, could significantly expand available collateral for lending. However, a key determinant in this evolution will be the crypto sector’s ability to rehabilitate its reputation. This has been stymied by recent market turmoil and challenges. The sector’s success in addressing these issues will be crucial for fostering trust and encouraging broader adoption of blockchain in private credit markets.

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