Stablecoin-driven trillion-dollar credit market, constrained by off-chain risk control.

Author: Vaidik Mandloi

Translation: Luffy, Foresight News

In the 1970s, Bruce Bent and Henry Brown founded the world's first money market fund. The business model was extremely simple: regulatory rules enacted during the Great Depression capped U.S. bank savings deposit interest rates at just 4.5%, while U.S. Treasury yields at the same time exceeded 9%. However, for individuals to invest in Treasuries, the minimum entry threshold was as high as $10k. The two came up with the idea of pooling small funds from retail investors, buying Treasuries in bulk, and then returning the yield proportionally to investors. Today, the money market fund industry has grown to approximately $8 trillion.

Stablecoins are replicating the same business logic, but this time targeting private credit as the underlying asset — a $2 trillion market with entry barriers of at least $10k. Interest-bearing stablecoins aggregate massive amounts of small funds and channel them into the private credit market.

In this article, I will delve into how this happened and how Goldfinch collapsed, locking up $56 million in depositor funds in motorcycle loans in Kenya.

How Stablecoins Became the Money Market Funds of Private Credit

In the 1990s, the U.S. banking system provided nearly half of all debt financing to businesses and households; today that figure is only 20%. After the 2008 financial crisis, new capital regulatory rules were implemented, significantly increasing the cost for banks to hold leveraged loans on their balance sheets. Institutions withdrew entirely from middle-market credit, and private credit funds stepped in to fill the gap.

Asset managers like Apollo, Blackstone, and KKR raised funds from pension funds and insurance companies, lending to businesses that banks had abandoned. These companies had scarce financing channels, allowing institutions to charge high risk premiums.

The industry has grown from less than $200 billion in 2008 to over $2 trillion today, with virtually all capital coming from institutional investors making individual commitments of at least $5 million.

The reason private credit sets a minimum investment threshold of millions of dollars is that post-loan management costs are extremely high: each credit requires due diligence, debt restructuring, and years of ongoing monitoring. Managing ten institutional LPs each investing $50 million is far easier than managing thousands of retail investors each putting in $500, where scaled operations may not even be profitable. Over the past decade, only pension funds and insurance companies have been able to enjoy stable credit returns in the 8%-12% range.

Interest-bearing stablecoins have completely rewritten the industry's rules, just as money market funds in the 1970s opened Treasury investment to ordinary people. The underlying risk control and due diligence are still performed by professional institutions like Apollo at institutional standards, but tokenized bridge funds can accept deposits of any amount without barriers, pooling them into institutional credit strategies without needing to individually onboard vast numbers of retail investors.

Apollo recently launched a tokenized credit fund, ACRED, which has already seen $109 million flow into its diversified credit product. Investors can even deposit ACRED tokens into Morpho as collateral for borrowing, leveraging up to amplify returns.

Figure has built a complete on-chain lending infrastructure, with cumulative loans of $21 billion, and is listed on Nasdaq. It also issues an interest-bearing stablecoin, YLDS, with a circulating supply of $376 million. Protocols like Pyse and Glow have gone further into niche sectors, tokenizing solar projects, allowing investors to invest in photovoltaic power plants in developing countries for just a few hundred dollars, earning annualized returns from monthly electricity bill repayments.

This does not mean that the institutional funds themselves have removed their barriers; direct subscription to the ACRED master fund still requires $5 million. However, after asset tokenization, tokens can be traded on secondary markets without barriers and can be combined with DeFi legos, features that traditional fund shares cannot achieve.

Traditional private credit funds have lock-up periods of several years, with quarterly redemption limits of only 5%. On-chain assets, however, can be traded 24/7 and freely combined. For institutions like Apollo and Figure, this allows them to access the $315 billion stablecoin pool that is actively seeking yield. By tokenizing funds, they can directly tap into this capital pool, opening new distribution channels without having to build retail infrastructure from scratch.

A year ago, the total on-chain private credit was only $400 million; today it stands at $5.87 billion, a 15-fold increase in 12 months. Even so, this accounts for just 0.3% of the global $2 trillion private credit market. In Q1 2026, half of newly issued stablecoins were yield-bearing, meaning most new stablecoin capital is actively pursuing real credit returns, rather than just seeking a dollar-pegged price anchor.

More critically, every on-chain credit asset can be used as collateral and cycled through various DeFi protocols, eventually generating transaction volumes far exceeding the principal amount.

Take ACRED as an example: an investor deposits $10k in ACRED, borrows 7,000 USDC against it on Morpho, and then buys more ACRED to re-pledge. A single $10k principal can ultimately unlock over $17k in credit exposure. In contrast, in traditional private credit, a $10k investment remains static for five years with no amplification. On-chain assets magnify market expansion speed through multiple layers of recycling, but risks also propagate: any default on an underlying loan will spread losses along the leverage chain.

Asset tokenization does not eliminate the inherent risks of underlying credit. During a period of continuous capital inflows, new deposits can cover redemption demands, masking risks. Once inflows slow down, the contradiction between token yield commitments and the actual repayment capacity of underlying loans becomes fully exposed. Investors rush to redeem, market liquidity dries up, and token prices decouple significantly from the net asset value of underlying assets.

Goldfinch's collapse is a classic case. The protocol, launched in 2021, was one of the first to bring private credit on-chain. It was recently forced to shut down, with $56 million in user funds trapped in offline loan businesses in Kenya and Nigeria.

Goldfinch's Fatal Mistakes

In 2021, Goldfinch completed a $25 million funding round led by a16z. At that time, DeFi lending pools offered only 2%-3% APY, and the project planned to channel crypto funds to small and micro businesses in Africa and Southeast Asia. Local traditional banks refused to serve these customers, and borrowers were willing to pay high loan interest rates of 15%-25%.

The protocol's design seemed simple: users deposit USDC into a pool, and smart contracts automatically allocate funds to borrowers within seconds. But lending to a motorcycle financing company in Nairobi required the team to thoroughly understand Kenya's local transportation industry, conduct offline on-site verification of company finances, and even pursue door-to-door collections after defaults.

These risk control steps could not be handled on-chain. Once USDC was converted into Kenyan shillings and lent out, depositors could not track where the funds went, the business status of borrowers, or confirm whether loan terms were being properly fulfilled. All core information determining credit quality was stored off-chain, controlled by borrowers in countries most investors had never visited.

This also led to a major violation going undetected for months: in 2022, local partner Tugende Kenya unilaterally transferred $1.9 million of its $5 million credit line to an affiliated entity in Uganda, diverting nearly 40% of loan funds to an offshore entity not specified in the contract. Meanwhile, depositors continued to receive 10%-12% book yield, completely unaware that the underlying funds had been illegally diverted.

When traditional private credit institutions discover such serious contract breaches, they would initiate collections and debt restructuring within days. But Goldfinch users could only learn the truth through governance forum posts and could only initiate governance votes with no legal enforcement power. They had no right to seize assets or audit remaining credits.

In 2023, Tugende completely defaulted and disappeared. During Goldfinch's operational period, it issued 24 pools totaling $113.3 million. Only 13 pools fully repaid. Eight pools held $53.82 million in outstanding loans, all deviating from original repayment terms, mostly in debt restructuring, with each pool collecting less than $51k monthly. At that repayment rate, fully recovering $53.82 million would take 8 to 15 years.

Goldfinch took on all the credit risks of emerging markets—currency volatility, lack of credit history—without building the risk control and collection infrastructure that traditional institutions have spent decades developing. For example, local Kenyan banks have physical branches, local regulatory connections, and ample leverage when bad debts arise.

Goldfinch merely funneled global anonymous wallet funds into similarly high-risk borrowers, yet lacked a complete offline risk control system, significantly widening the information gap between lenders and borrowers. Once defaults occurred, depositors had almost no means to intervene.

On-chain asset tokenization accounts for only 10% of the credit business workload. The remaining 90%—due diligence and collections—relies heavily on localized resources with high build costs. Credit underwriters must establish credible foundations for entire asset classes. Every bad debt caused by risk control lapses raises the bar for institutional on-chain cooperation and undermines the credibility of the entire sector.

The real challenge of credit business has nothing to do with on-chain technology. Practitioners in this field who fail to see this will only end up replicating another Goldfinch-style collapse.