Tokenized unlocking of private credit

Article by: Zeus

Edited by: Block unicorn

Private lending means borrowing money without going through a bank. Individuals and businesses do not need to approach commercial banks but can borrow from private lending institutions. These institutions can be investment funds, specialized lending agencies, or financial companies. Borrowers obtain the funds they need, while lenders earn interest for taking on the risk. It’s that simple. That’s the core idea of private lending.

The existence of this market is because banks do not lend 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 fund lock-up periods, they typically charge higher interest rates.

This is why the yields on private credit are usually higher than those on savings accounts or government bonds. Someone is paying for these returns, and they don’t come out of thin air.

For a long time, private credit was difficult to access. You needed substantial capital to get involved, and your funds were often locked up for years. It was hard to sell your position, and once invested, you had limited information. This was advantageous for large investors but kept most people out.

Tokenization has not changed the essence of private credit; it has changed how it operates. Loans still exist in the real world, with legal contracts still in place, and borrowers still repaying loans. The difference is that ownership is no longer tracked through paper documents and opaque systems but is instead recorded digitally on the blockchain.

You can think of it this way: the loans themselves haven’t changed, only the system around them has been upgraded. That’s why private credit has become one of the largest real-world assets (RWA) on-chain.

The amount of funds flowing through on-chain lending exceeds that flowing through gold, stocks, or real estate. This is because investors focus on stable income and scalability.

For example, suppose someone takes out a mortgage-backed loan, and these loans are bundled together. Investors put their funds 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 buy or sell more easily.

Another example is private credit funds. These funds lend to many borrowers simultaneously. Tokenization allows for smaller investment sizes and easier access, while the fund still needs to comply with standard rules and regulations.

Tokenization can simplify access, reduce management work, speed up processes, and increase transparency. But it cannot eliminate risk. If borrowers stop repaying, losses occur. If many people withdraw simultaneously, liquidity may vanish.

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

Therefore, when evaluating any private credit product (whether blockchain-based or not), the questions are simple:

Who is borrowing?

Why do they need this money?

What collateral backs these loans?

How will the funds be recovered?

Why does this product offer this yield?

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

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