As per the latest data from RWA.xyz, digital ledgers are witnessing a significant rise in active private loans, which has gone up by 55% since the beginning of 2023, amounting to approximately $408 million as of November 28th. However, despite this growth, it is still much lower than the peak of almost $1.5 billion last June and is a small fraction of the traditional market for private credit which amounts to $1.6 trillion.
It is worth noting that borrowing costs differ from one deal to another. Some blockchain protocols are charging less than 10%, which is significantly lower than the double-digit rates charged by traditional service providers in the current environment. These figures have been confirmed by RWA.xyz and private credit lenders.
Supporters of digital ledgers argue that they improve transparency in business deals and payments. This is because blockchains are open to the public, allowing anyone to scrutinize them. Additionally, smart contracts, which are like software programs, can be used to keep track of loans and collateral and can automatically take action to prevent problems.
Agost Makszin, co-founder of Lendary (Asia) Capital, mentioned that the on-chain transparency and liquidation mechanisms have effectively mitigated lending risks. This has led to reduced borrowing rates in comparison to traditional private credit, which often involves slower processes and longer liquidation cycles.
Some big financial companies and organizations have said that the way private credit works is too hard to understand. Private credit has gotten much bigger in the last few years and is now used to give loans to small businesses, help people buy companies, and invest in things like real estate and infrastructure. Lots of people want to invest in private credit because they think it's a good way to make money.
In the world of finance, some new technologies are emerging that are changing the way people invest and borrow money. One of these is called blockchain, and it allows people to pool their money together and invest it in different projects. This is done using a type of digital currency that is pegged to the value of the US dollar. Borrowers can then use this money to fund their projects, and everything is managed through a type of computer program that ensures everyone follows the agreed-upon terms.
One effective approach to enhance investor confidence in lending protocols is to implement measures such as loan structuring or collateralization using tangible assets. As per the data provided by RWA.xyz, the majority of active loans ranked by value are attributed to the consumer, auto, and fintech sectors, with real estate, carbon projects, and cryptocurrency trading following suit.
Maple Finance's co-founder Sidney Powell has stated that they plan to capitalize on their use of blockchain technology and smart contracts to streamline their loan management process, reduce operational costs, and speed up loan funding. By leveraging these advanced technologies, Maple Finance aims to gain a competitive advantage in the lending industry.
Turbulent History
During the $1.5 trillion crypto market crash last year, Maple Finance, along with several other digital-asset firms, suffered significant losses. The crash resulted in the bankruptcy of numerous businesses, including Sam Bankman-Fried's FTX empire. Additionally, the leveraged positions within the crypto ecosystem that were chasing high speculative yields without adequate risk management were wiped out.
The recent failure of a digital lending platform has made people doubt the safety of lending in the world of cryptocurrency. Even though the losses were related to lending in digital-asset projects and not in real-world businesses, the incident has left a negative impact on the idea of crypto lending. However, decentralized lending has still seen a 120% increase in value this year, reaching about $22 billion. This is still lower than the highest value of $54 billion in April 2022, according to DefiLlama data.
The world of digital assets, such as cryptocurrencies, faced a lot of difficulties last year, but it's slowly recovering. However, one of the biggest challenges that digital assets are facing is the lack of easy access to banks. Banks are hesitant to deal with digital assets because they can be used for illegal activities. This makes it hard for people to convert their digital assets into traditional currency and vice versa. Additionally, digital assets are still not widely understood or trusted by traditional financial institutions, who worry about the safety and security of transactions made on digital ledgers.
According to Sidney Powell, one of the co-founders of Maple Finance, they plan to use a technology called blockchain and smart contracts to help them manage loans more efficiently. This will make it easier for them to save money and provide loans faster than their competitors, giving them an advantage in the market.
Receivables Financing
Intero, a financial company, leveraged its federal tax rebates as collateral to secure receivables financing. This strategic move enabled the firm to obtain capital rapidly and at a favorable interest rate, while also benefiting from a secure, immutable, transparent, and predictable transaction environment. According to Tom de la Rue, one of the co-founders, this provided a distinct advantage over obtaining liquidity from private credit markets, which can be less reliable and transparent.
The financial industry has been active lately. At the beginning of 2023, two companies, Maple Finance, and AQRU, allowed a company called Intero Capital Solutions LLC to access $3 million in virtual currency from a digital credit pool. Later that year, another company called Goldfinch loaned $1.35 million in virtual currency to a fintech firm named Fazz in Singapore. This was Goldfinch's first loan that allowed them to ask for repayment of the principal amount at regular intervals.
Charlie You, the co-founder of RWA.xyz, pointed out that there is a significant difference between blockchain-based private credit and traditional non-bank lending. One of the key differences is that the former offers more fixed-rate offerings, while the latter tends to be variable. This is because digital ledgers eliminate the need for manual back-office layers, therefore reducing costs.
"You" stated that the utilization of advanced means of financing not only results in cost savings but also facilitates the issuance of lower principal sizes, which was previously not possible through traditional methods, especially in the case of complex financing structures. These cost savings are also shared with the issuers.
The possibility of significant amounts of private credit flowing across blockchains remains uncertain. Tokenization, which involves creating digital versions of real-world assets, could potentially generate more collateral for lending. However, the success of this approach depends on the ability of the cryptocurrency industry to restore its credibility.
