Credix Yield Generation
Given the recent turmoil in the market, the UST debacle, and market calamities we have decided to explain a bit more in detail how the Credix protocol is generating yield.
Credix unlike most DeFi protocols is generating income from cash-flow generating assets such as loans, receivables, or other credit rights. Our main goal is to enhance returns and deliver a positive return independent of market cycles. This is why our investment strategies tend to have low sensitivity to investments such as stocks or crypto-assets. We’ll dive a bit deeper below.
Private Credit Investing
Many businesses in the financial industry hold significant cash balances and are investing this in treasury bills, municipal and corporate bonds, and money market securities. These publicly traded securities typically have high liquidity and provide a lower-risk fixed-income investment opportunity. Public debt strategies prioritize steady cashflows and capital preservation over asset value appreciation.
Besides the trillion-dollar market of public credit, many alternative asset managers and hedge funds are seeking their returns in the market of private credit. An $800 billion market where financial institutions and non-bank lenders are negotiating credit deals with SMEs, corporations, and individuals. These deals tend to have higher illiquidity and risk but are privy to a more attractive interest rate than investments in traditional bonds. For many large financial market players, they provide a perfect hedge against losses in their portfolios due to uncorrelated returns.
Alternative Lending
A fast-growing segment of the private credit market is that of alternative lenders. Where financial technology (FinTech) companies are competing with traditional banks to provide loans to small businesses and consumers. Traditional banks and credit unions are often highly risk-averse, oftentimes only providing credit to those with the highest credit scores. Alternative lenders use sophisticated credit scoring techniques and technology to provide loans quickly and with far greater ease.
The alternative lenders do not have a balance sheet to lend from like banks are able to do (due to retail and corporate deposits). Instead, they are funding their activities through the capital markets with institutional investors. Hedge funds were the early buyers of this asset class, seeking alpha by selecting individual loans. As the industry matured it moved to credit funds and asset managers buying these loans in bulk. Today this happens via securitization, the process in which these loans are pooled so that they can be repacked into an interest-bearing asset.
Alternative lending is seen as a compelling strategy for investors due to the combination of attractive yield and relatively low duration. This said it does reflect a diversified opportunity ranging from unsecured consumer lending (e.g. student loans) to secured SME financing (asset-backed loans).
Emerging Markets
Today the market for alternative lending is pretty mature in geographies like the USA, the UK, and Europe. Having big bulge bracket banks coming into the space and platforms provides an efficient infrastructure for this $10 billion industry. Resulting in lower-risk, lower-yield investment opportunities.
The next generation of growth for alternative lending is coming from emerging and frontier markets. Where FinTech lending is growing and promising to solve pains faced by many companies and consumers in search of credit. These credit markets are often characterized by high-interest rates and a level of bureaucracy often considered excessive by borrowers. With the intensive use of technology that is characteristic of FinTechs, startups not only compete with traditional banks in rates and special conditions for offering credit but mainly by improving the user experience.
Credix specifically is focusing on the Latin American market where we now have +1,000 companies competing with the traditional finance industry. Also regulators are fostering innovation by allowing for new licensing models and easier processes for FinTech lenders to operate.
So, how does Credix work?
Credix is pooling USD Coin (USDC) from institutional investors to buy loan portfolios from alternative lenders in these emerging markets. The Credix protocol is supported by an ecosystem of sophisticated underwriters who do due diligence on these portfolios and supply first-loss capital. Meaning our liquidity pool investors are secured by a buffer of capital. Because we pool these portfolios we diversify the risk across different underlying asset classes (consumer vs. SME, secured vs. unsecured). Allowing for a lower-risk return profile non-correlated to the stock or crypto markets. Our strategy is not risk-free. Some risks include default risk of the underlying borrowers, interest rate risk, and liquidity risk. These are managed closely by our internal structuring team and protocol committee. Credix is built on the Solana blockchain but does not have any exposure to cryptocurrencies. USDC is a 1–1 backed stable coin issued by the regulated financial company Circle, dollars are held in custody with BNY Mellon and audited on a monthly basis. We leverage blockchain technology to create more transparency in our portfolios, automated payment calculations, secured decentralized custody of assets, and global 24/7 settlement. Invested capital generally benefits from the stability of the USD Coin combined with the generation of higher returns than traditional investment products. This is due to the exposure to asset-backed products that are generating cash flow due to the underlying loan portfolios.
As of writing, the Credix liquidity pool is currently generating +14% in yield (IRR) on USDC.
Interested to learn more or investing, check it out!
