AAVE Founder warns that DeFi can't be turned into a withdrawal from Wall Street private lending

Original by:Oh, Stani

Compiled by Ken, Challenger

 

Private lending is now in a strange situation。

The economy is closely linked to the cost of finance. Low interest rates mean low borrowing costs and should theoretically lead to higher utilization of credit instruments. Conversely, high interest rates mean high borrowing costs and theoretically reduce the need for credit。

Since the Fed began its aggressive austerity cycle in March 2022, we have been living in a high-interest rate environment: by mid-2023, interest rates had soared from near-zero levels to over 5 per cent, the fastest interest-rate increase in 40 years. As of the beginning of 2026, interest rates remained high, with only a small reduction during the period. For many consumers and businesses that start borrowing at low or medium interest rates and have outstanding debts, this means that the cost of finance has risen significantly and that the burden will increase over time。

It all sounds normal. From growth to maturity, finance spans almost every stage of the corporate life cycle. The problem, however, is that when capital costs remain high in the long run, they cause unsustainable expenditures on borrowers。

Businesses usually borrow from financial institutions such as banks or from asset management companies in the form of private loans。

How does private credit fund work

Private credit funds are usually closed or semi-liquid investment instruments managed by asset management companies. This structure makes sense: the Fund needs to deploy funds into lending opportunities to generate returns. Private credit is financed by a broad group of investors, ranging from pension funds, insurance companies, family offices to a growing number of scattered investors today。

CLOSED FUNDS ARE NOT ALLOWED TO BE REDEEMED BEFORE THEIR EXPIRY (USUALLY BETWEEN 7 AND 10 YEARS). SEMI-LIQUID FUNDS PROVIDE A LIMITED QUARTERLY BUYOUT WINDOW. THE PUBLICLY TRADED BUSINESS DEVELOPMENT CORPORATION (BDC), ON THE OTHER HAND, PROVIDES LIQUIDITY THROUGH DAILY TRANSACTIONS ON EXCHANGES。

In essence, the functions of private credit funds are similar to those of private banks: they lend to enterprises and charge interest。

In which areas do private loans fund

Typically, private loans finance leverage acquisitions of private equity, loans to medium-sized enterprises that do not have access to open bond markets, and loans to support certain assets (such as aircraft, shipping and consumer loans) and real estate credit。

PRIVATE CREDIT FUNDS OFTEN FILL THE FINANCING GAP LEFT BY BANKS ' WITHDRAWAL. THIS SHIFT WAS DRIVEN MAINLY BY POST-2008 REGULATORY POLICIES (ESPECIALLY BASEL III), WHICH FORCED BANKS TO WITHDRAW FROM HIGHER-RISK BUSINESS LENDING. TODAY, IT IS ESTIMATED THAT BETWEEN 80 AND 90 PER CENT OF LEVERAGE ACQUISITIONS IN THE US MEDIUM-SIZE MARKET ARE FINANCED BY PRIVATE LOANS。

What are the main participants

• Apollo ~ $460B AUM

• Blackstone ~ $330B AUM

• Ares ~ $280B AUM

• KKR ~ $220B AUM

• Carlyle ~ $190B AUM

• Blue Owl ~ $170B AUM

What's the status

In the recent past, the area of private credit has become difficult. The high capital costs associated with high interest rates remain a real problem, while artificial intelligence is reshaping perceptions of many software companies financed by private loans, creating uncertainty about the future of these borrowers。

The market has begun to repricing private loans:

• VanEck BDC Income ETF: Declining by about 15% over the past year

• Blue Owl Capital: The decline in the past year was about 50%, with about 30% falling in 2026

• Apollo, Blackstone, Ares, KKR: Stock prices fell by about 20% because of concerns about private lending

AT PRESENT, BDC ' S AVERAGE TRANSACTION PRICE IS ABOUT 20 PER CENT ABOVE ITS NET ASSET VALUE (NAV) DISCOUNT, WHILE PROVIDING A RATE OF RETURN OF 10 TO 11 PER CENT, WHICH SENDS A CLEAR SIGNAL: THE PORTFOLIO MAY BE OVERESTIMATED, DEFAULT RATES MAY RISE, OR LIQUIDITY RISKS ARE ACCUMULATING. IT IS EVEN MORE WORRYING THAT, HISTORICALLY, THESE FUNDS ARE USUALLY TRADED IN PREMIUM。

THE MONITORED LOAN DEFAULT INDICATOR FOR SOME FUNDS HAS RISEN TO 9 PER CENT. BLACKSTONE'S FLAGSHIP PRIVATE CREDIT FUND BCRED IS A REMARKABLE EXAMPLE。

BCRED recently restricted foreclosure. The size of the fund was approximately $82 billion, and in the first quarter of 2026, foreclosure requests amounted to $3.7 billion, or about 8 per cent of NAV. Blackstone injected $400 million in its own funds to support liquidity. Technically, the fund was not completely frozen, but it was also very close。

AT THE SAME TIME, THE US$ 26 BILLION HPS ENTERPRISE LOAN FUND (HLEND) IN BELED RECEIVED US$ 1.2 BILLION IN RANSOM REQUESTS, REACHING THE POINT WHERE IT HAD TO BE FROZEN. SOME $580 MILLION IN RANSOM REQUESTS WERE NOT HONOURED。

Blue Owl’s private lending product to the diaspora was redeemed by $2.9 billion in the fourth quarter of 2025, reaching 15 per cent of NAV, largely due to its exposure to the software industry。

Can the market afford to default on private credit funds

ALTHOUGH THE TOTAL FORECLOSURES HAVE REACHED OVER $7 BILLION (5-10 PER CENT OF NAV) AND THE EQUITY PRICES OF THE LISTED ALTERNATIVE ASSET MANAGEMENT COMPANIES HAVE FALLEN BY 20-30 PER CENT, THE OVERALL PRIVATE-MARKET CREDIT MARKET IS STILL AT BETWEEN $1.8 TRILLION AND $2 TRILLION. EVEN THE LARGEST FUNDS ARE IN THE RANGE OF $20 BILLION TO $80 BILLION, COMPARED TO $13 TRILLION IN GLOBAL BOND MARKETS AND $18 TRILLION IN BANK ASSETS. A SINGLE FUND WITH A HIGH PROBABILITY OF DEFAULT WOULD NOT LEAD TO A WIDER MARKET COLLAPSE, NOR WOULD IT TRIGGER THE CONTAGION EFFECT OF THE MAGNIFYING CRISIS. IN ADDITION, LARGE FUNDS HOLD A DIVERSIFIED PORTFOLIO OF HUNDREDS OF LOANS, AND SEMI-LIQUID OR CLOSED STRUCTURES NATURALLY FORCE THE TARGETING OF INVESTORS ' FUNDS, THUS BUFFERING BANK-LIKE RISKS。

I've developed three scenarios of increasing severity:

• SCENARIO A: A LARGE FUND DEFAULT (APPROXIMATELY $50 BILLION). INVESTORS LOST MONEY, SOME COMPANIES LOST FINANCE AND CREDIT SPREADS EXPANDED. THE FINANCIAL SYSTEM IS LIKELY TO ABSORB THE SHOCK。

• SCENARIO B: MULTIPLE FUNDS ARE CLOSED AT THE SAME TIME. CREDIT MARKETS ARE FROZEN AND HIGHLY LEVERAGED COMPANIES ARE UNABLE TO REFINANCE, TRIGGERING CHAIN DEFAULTS. THIS MAY TRIGGER A CREDIT CYCLE DECLINE。

• SCENARIO C: PRIVATE FUNDRAISING CREDIT + LEVERAGE LOAN COLLAPSE. A BROADER CORPORATE CREDIT CRISIS ERUPTED: PRIVATE EQUITY TRANSACTIONS FAILED AND BANKS FACED RISK EXPOSURE. THIS WOULD BE A REAL SYSTEMIC CRISIS。

FORTUNATELY, AT THE MACRO LEVEL, PRIVATE CREDIT FUNDS REMAIN RELATIVELY SMALL AND ARE UNLIKELY TO POSE SYSTEMIC RISKS IN THEMSELVES. HOWEVER, THE MOST WORRYING SCENARIO IS THAT THE COLLAPSE OF CONFIDENCE SPREAD FIRST IN THE PRIVATE LENDING MARKET (ESPECIALLY IN THOSE AREAS WHERE LOANS ARE GRANTED TO ENTERPRISES VULNERABLE TO AI SHOCKS) AND THEN INFILTRATED THE OPEN BOND MARKET. THIS TRANSMISSION PATH IS PERFECTLY REASONABLE, SINCE LARGE ENTERPRISES IN THE BOND MARKET CAN BE SAID TO BE MORE VULNERABLE TO AUTOMATION AND AI SUBVERSION THAN THOSE THAT ARE USUALLY FINANCED BY PRIVATE LOANS, WHICH ARE STREAMLINED AND HIGH-GROWTH。

How does this affect RWA and DeFi

The most direct impact of the difficulties of private lending has been on those who allocate capital. Many private credit funds have been distributed to bulk investors through publicly traded BDCs, private loans ETFs or semi-liquid funds (e.g. Blackstone BCRED, Apollo Debt Solutions BDCs and Beled's HPS Enterprise Loan Fund)。

These funds have common features: quarterly (or monthly) foreclosure windows, usually limited to 5 per cent of NAV quarterly, with a target return of 8 to 11 per cent. Recently, some funds have also begun to freeze (gating) foreclosures。

From the point of view of DeFi capitalizers, I think that the greatest risk is structural: private lending is a packaged approach in DeFi, which is often not fully understood by many open-door users before they invest. We have seen countless examples of DeFi users actively investing their money in a real world asset (RWA) strategy with high returns, and it was only later that they discovered that their bottom openings had significant long-term risks。

I think real world assets represent DeFi's greatest opportunity in the near future. My biggest concern, however, is that institutional speculators may see DeFi as a channel for the sale of a product that Wall Street has no longer been used to sell, and indeed as an exit from liquidity. This risk is further amplified by the fact that it is more difficult to assess RWA allocation opportunities per se: they do not have the transparency or chain probabilities that native DeFi opportunities offer。

Having said that, if well-functioning in the chain, private lending will provide what traditional finance simply cannot provide: guarantees enforced by smart contracts. Foreclosure windows, withdrawal limits, mortgage rates and allocation rules can all be coded unaltered, which means that fund managers are not free to change the terms after capital investment. In traditional private lending, investors paid a heavy price on BCRED and HLEND to find that when market conditions deteriorated, fund managers could decide to tighten or freeze foreclosure policies. In the chain, these rules are transparent from day one and are enforced by code rather than by the Fund Manager under pressure. That's the key to RWA and DeFi going beyond traditional models in this asset class。

In order for RWA to succeed in DeFi, and for DeFi to be able to achieve meaningful scale expansion through real world assets, the whole industry needs to carefully and carefully construct opportunities to connect TradFi (traditional finance) and chain markets. This means establishing strong standards of transparency, appropriate risk disclosure, independent validation of bottom collateral, and a governance framework to protect participants in the chain from information asymmetries. Without these safeguards, the integration of TradFi and DeFi could become a pure extraction rather than a value gain。

DeFi should not become Wall Street's exit liquidity。