Written by: Zeus

Translated by: Block unicorn

Private credit is borrowing money without going through a bank. Individuals and businesses borrow from private lending institutions instead of commercial banks. These institutions can be investment funds, specialized lending agencies, or financial companies. Borrowers obtain the funds they need, while lending institutions earn interest for taking on the risk. It's that simple. This is the entire concept of private credit.

The existence of this market is due to banks not lending to everyone. Banks have strict regulations, lengthy processes, and many loan applications are rejected. Private lending institutions fill the gap left by banks, but due to higher risks and longer lock-up periods for funds, they charge higher interest rates.

This is why the yields on private credit are typically higher than those of savings accounts or government bonds. Someone is paying for this yield; it does not come from nowhere.

For a long time, participating in private credit has been difficult. You need a significant amount of capital to enter, and your funds are often locked up for several years. It is hard to sell your position, and once invested, you have limited information. This is advantageous for large investors but keeps most people out.

Tokenization has not changed the essence of private credit; it has changed the way it operates. Loans still exist in the real world, legal contracts are still in place, and borrowers still repay loans. The difference is that ownership is no longer tracked through paper documents and hard-to-view systems, but rather digitally on the blockchain.

You can understand it this way: the loan itself has not changed; only the system surrounding it has been upgraded. This is why private credit has become one of the largest real-world assets (RWA) on-chain.

The amount of money flowing through lending on-chain is greater than that flowing through gold, stocks, or real estate. This is because investors are focused on stable income and scalability.

For a simple example, suppose someone takes out a loan secured by the value of their home, and these loans are bundled together. Investors put money into this pool and earn interest as homeowners repay their loans. Through tokenization, investors can hold their shares digitally, see repayment statuses more clearly, and sometimes trade more easily.

Another example is private credit funds. These funds provide loans to numerous borrowers simultaneously. Tokenization allows for smaller investment sizes and easier access, while the fund still needs to comply with regular rules and regulatory requirements.

Tokenization can simplify the access process, reduce management work, speed up transactions, and increase transparency. However, it cannot eliminate risk. If a borrower stops repaying, losses will occur. If many people exit at the same time, liquidity may disappear.

Tokenized private credit is essentially still lending. You still need to trust that borrowers will repay on time and trust that fund managers will do their jobs well. This technology does not protect you from bad loans.

Therefore, when evaluating any private credit product (whether or not it is based on on-chain technology), the questions are straightforward:

• Who is borrowing?
• Why do they need this money?
• What collateral is there for these loans?
• How will the funds be recovered?
• Why is there this yield?

If the answers to these questions are unclear, then walk away.

This is why private credit is so important to tokenization. It is about how to move one of the world's largest lending markets onto a more robust track.

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