Crypto credit innovator Idle launches onchain private credit vault on Optimism

Onchain credit and yield platform Idle has launched a new credit vault that allows users to lend directly to businesses onchain, according to an announcement on Thursday. The firm has partnered with M11 Credit, a unit of Maven 11, on the new product, which will be built on Optimism.

The move also represents the first instance of prime brokerage lending in DeFi. These loans, issued under Idle’s institutional arm Pareto, will be backed by loans from a prominent prime brokerage player in crypto (which asked to remain anonymous), with M11 Credit serving as underwriter, risk monitor and ​​vault administrator.

The blockchain-based credit sector has grown significantly since the collapse of the crypto lending markets during the last bear market. Idle, launched in 2019, is among a number of startups looking to expand the types of products on offer in recent months and draw the world of DeFi and TradFi closer.

"Throughout these years, we dealt with different primitives,” Idle co-founder Matteo Pandolfi told The Block in an interview. “At first, we started with an aggregation layer, and then we started traunching different markets. And this concept of risk traunching moved us toward "new yield strategies with varied risk profiles."

Private credit, often called direct lending, is a type of debt financing where loans are negotiated privately between non-bank lenders and borrowers. It’s typically seen as an alternative to traditional bank loans for borrowers in need of capital who can't access public credit markets. According to a recent McKinsey report, the asset class grew to nearly $2 trillion in 2023.

Idle’s protocol will offer many features typically associated with these types of loans, including the ability for borrowers to set tailored terms and lenders to invest in different “risk tranches,” Pandolfi said.

“On the borrower side, we are offering a very tailored credit facility that basically lets them decide which rate he wants to pay, set the duration of each lending cycle and also the delta for a possible early exit option,” Pandolfi said.

Lenders, both institutional and retail, will likewise be able to “enter with institutional-grade terms … with the same rights of the big players,” he added.

Loan origination will happen onchain with the flow of financing stemming from a number of liquidity providers looking for yield funneling money into a credit vault maintained by Idle. That pool will be administered by M11 Credit, and the prime brokerage will serve as a “parent borrower.”

From there, “child borrowers” who need access to capital can borrow and deploy it onchain or offchain. This is one of the only — if not the only — private credit facility involving a digital asset prime brokerage.

Idle seeded the market with an initial $10 million and aims to scale that to $15-$20 million, Pandolfi said, adding the targetted yield is around 20% APY for lenders.

The loans will feature a 30-day evergreen loan facility (i.e., a loan that does not require the repayment of principal during the life of the loan, only interest) with a 30-day callback period. The duration of the onchain component of the loan will remain fixed, while child borrowers can borrow at variable durations.

Pandolfi noted that legal and blockchain-based systems limit what borrowers can use the capital for.

“Obviously, we don't want borrowers to use this money to bet on a Juventus game,” he said, adding the team is exploring tools — possibly from ZK-powered crypto credit analytics startup Accountable — to help monitor how the funds are deployed offchain.

Idle has also tapped crypto compliance startup Keyring for its KYC process, allowing borrowers and lenders to maintain a degree of anonymity through zero-knowledge proofs. “We are dealing with institutional funds that should know where the funds are coming from,” Pandolfi said.

The eight-person Idle team has raised a total of $2.8 million from the likes of Consensys, Fasanara Digital and Rockaway.