17 hours ago
The Rise Of Private Credit: How Wall Street And DeFi Are Converging
Luke Lombe is a Founding Partner of Faculty Group—a global web3 venture studio—Director of and Founder of
Over the past 15 years, the global credit landscape has undergone a quiet but radical transformation. In the wake of the 2008 global financial crisis, regulatory overhauls resulted in traditional banks scaling back lending to all but the safest borrowers. As a result, a segment of the market—particularly middle-market businesses and specialized industries—struggled to obtain funding.
Enter private credit. Once considered niche, private credit has evolved into a multi-trillion-dollar asset class. From bulge-bracket firms to specialists, there's now a global race to deploy private credit into the real economy.
But with this growth comes a challenge: There's more money than deals, and that's where the market is innovating. With more than a decade in Web3 and fintech, I've worked directly with global institutions and DeFi protocols to structure tokenized credit deals that align first-loss DeFi capital with senior TradFi funding—experience that has given me a firsthand view of some of the solutions taking shape.
The Post-GFC Shift: Why Banks Stopped Lending
After the 2008 crisis, regulatory frameworks like Basel III tightened lending standards and increased the cost of risk-weighted assets for banks. Traditional lenders retrenched to low-risk loans and sectors, and loans that once supported SMEs and mid-market borrowers became less attractive.
This retreat created a gap for businesses too small for bond markets but too big for venture debt. To help fill this void, non-bank lenders and private credit funds have emerged.
Institutions Are Flush, But Friction Remains
Private debt global assets under management surpassed $1.5 trillion in 2023 and are expected to reach $3.5 trillion by the end of 2028, according to BlackRock. But capital outpacing deal flow is a growing issue in private markets. A report by Allianz focused on private debt and private equity suggested that record fundraising may begin to strain origination pipelines, and these funds could face pressure to deploy or return capital to limited partners, prompting new approaches to deal sourcing and risk-sharing.
"Dry powder (uninvested capital) but also un-exited assets are set to remain at record levels in the coming years," the report said. However, it also noted: "Regarding PE fundamentals, current dry powder data indicates the challenge is not the lack of money ready for investment but the difficulties of finding good opportunities at the right price. This situation will likely drag on until the M&A and IPO market substantially accelerates and private equity capacity for distributions to investors recovers."
DeFi And TradFi: A Blended Credit Model
There's a hybrid finance model emerging in private credit that aims to help address funding challenges. It blends traditional finance (TradFi) and decentralized finance (DeFi). Here's how it works:
• Senior Tranche: Between 70% and 85% is funded by large-scale institutions seeking secured, lower-risk returns.
• Junior Or Subordinate Tranche: Roughly 15% to 30% is provided by DeFi lenders hungry for yield and willing to absorb first-loss risk.
• Borrower Co-Investment: The borrower provides a smaller capital injection to align incentives and satisfy underwriting thresholds.
With this structure, DeFi lenders can benefit from co-lending alongside multi-billion-dollar institutions that have conducted deep due diligence. TradFi lenders can benefit from downside protection via subordinate DeFi capital that absorbs early losses. And borrowers, or asset/credit originators, can receive full funding, even without posting 20% upfront.
This hybrid approach is already live. For example, Kasu, an RWA lending platform I founded, is facilitating deals where DeFi fills the first-loss capital and TradFi institutions fund the senior tranche. Others exploring models that bridge DeFi and TradFi include Centrifuge, Maple Finance and Goldfinch.
Where This Is Going
The convergence of DeFi and TradFi could reshape how capital is structured, risk is allocated and credit is underwritten. I expect to see future developments such as:
• Tokenized credit instruments tradable on secondary markets
• Risk-tranching protocols that match yield profiles to investor preferences
• Collaborative underwriting across decentralized autonomous organizations and institutional desks
• Real-time, on-chain data rooms for diligence and monitoring
But while the opportunity is immense, the path forward is not without friction.
Challenges To Consider
Regulatory uncertainty remains a top concern. DeFi-native platforms aiming to interact with institutional capital must navigate a fragmented global regulatory landscape. Questions around custody, know-your-customer and anti-money laundering compliance, and treatment of tokenized credit under securities laws remain unresolved in many jurisdictions. Without clearer regulatory frameworks, institutional allocators may remain hesitant to fully embrace these new channels, regardless of how compelling the yields might be.
Operational complexity is another significant hurdle. TradFi institutions are built on legacy systems and hierarchical compliance processes. Integrating with decentralized protocols—especially ones that rely on smart contracts, open governance or crypto-native infrastructure—requires not just new tech stacks but also new mindsets.
Finally, there's the human factor: trust and reputation. TradFi allocators are trained to work with counterparties they know, often over years of deal flow. DeFi, by contrast, is pseudonymous by design and rapidly evolving. Platforms looking to intermediate between the two worlds must go beyond technological innovation—they need to build durable relationships, compliance layers and reputational capital that satisfy the fiduciary standards of institutional investors.
Add to this the transient and liquid nature of subordinated DeFi lending, and you have real challenges to overcome. Navigating these challenges won't be easy, but for those who do, the potential reward is significant: a financial system that is more composable, inclusive and efficient, with capital flowing more freely to where it's needed most.
Conclusion
Private credit has become a compelling post-crisis trend in global finance. But I believe its future lies not just in asset management boardrooms but also in smart contracts, decentralized capital pools and tokenized deal flow.
As DeFi matures, it's becoming a legitimate funding layer for the real world. As TradFi seeks yield, it's increasingly willing to meet DeFi halfway—so long as risk is structured and aligned.
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