Rising from the Digital Ashes: The 55% Surge in Blockchain-Based Private Credit in 2023

The private credit sector in the cryptocurrency industry has experienced a significant resurgence in 2023. The year has seen a 55% increase in loans executed via blockchain technology, recovering from a steep decline experienced in the previous year. Despite the increase, the sector still falls short of its $1.5 billion peak reached in June of the previous year, and it remains a small fraction of the $1.6 trillion traditional private credit market.

Blockchain-based private credit is attracting more companies as it promises lower borrowing costs—some deals offering rates under 10% compared to the double-digit rates sought by traditional credit providers. Advocates of blockchain technology highlight its transparency and efficiency, with public digital ledgers and smart contracts that ensure clear deal terms and automated risk management.

Lendary (Asia) Capital’s co-founder, Agost Makszin, pointed out that the on-chain transparency and automated mechanisms reduce lending risks and contribute to lower borrowing rates compared to the traditional private credit market, which is often slower and encumbered by lengthy liquidation processes.

Digital ledger-based private credit is gaining popularity despite the turbulent history of crypto lending, which was marred by the $1.5 trillion crash last year, leading to significant losses and bankruptcies within the crypto space. While the total value of decentralized lending has increased by 120% year-to-date, it is still below the record highs of the previous year.

The digital-asset industry is navigating its recovery but faces challenges such as banking access and skepticism due to crypto’s association with illicit activities. The lack of a standardized credit rating system in the crypto lending market also hinders a full understanding of risks, according to researcher Tom Wan from digital-asset fund provider 21.co.

Despite these hurdles, blockchain-based private credit has seen some notable transactions. For instance, Intero Capital Solutions LLC was able to secure $3 million in stablecoins through Maple Finance and AQRU, while Goldfinch provided its first callable loan to Fazz in Singapore.

Blockchain’s advantages, including the elimination of manual back-office tasks and the ability to facilitate complex financing structures, offer cost savings and allow for smaller principal sizes that would be impractical in the traditional market. As the industry continues to evolve, the potential for private credit to flow more substantially through blockchains will largely depend on the sector’s ability to rebuild trust and its reputation.