{"id":223709,"date":"2021-04-10T10:17:00","date_gmt":"2021-04-10T07:17:00","guid":{"rendered":"https:\/\/en.buradabiliyorum.com\/defis-critical-missing-piece-credit-scores\/"},"modified":"2021-04-10T10:17:00","modified_gmt":"2021-04-10T07:17:00","slug":"defis-critical-missing-piece-credit-scores","status":"publish","type":"post","link":"https:\/\/buradabiliyorum.com\/en\/defis-critical-missing-piece-credit-scores\/","title":{"rendered":"# DeFi\u2019s critical missing piece: Credit scores"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_84 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a28eabe3dde5\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #dd3333;color:#dd3333\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #dd3333;color:#dd3333\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a28eabe3dde5\" checked aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/buradabiliyorum.com\/en\/defis-critical-missing-piece-credit-scores\/#By_size_reputation-backed_%3E_asset-backed_financial_systems\" >By size, reputation-backed &gt; asset-backed financial systems<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/buradabiliyorum.com\/en\/defis-critical-missing-piece-credit-scores\/#Structure_of_on-chain_credit_scores\" >Structure of on-chain credit scores<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/buradabiliyorum.com\/en\/defis-critical-missing-piece-credit-scores\/#Portability_is_critical\" >Portability is critical<\/a><\/li><\/ul><\/nav><\/div>\n<p>&#8220;<strong># DeFi\u2019s critical missing piece: Credit scores <\/strong>&#8221;<br \/>\n<img decoding=\"async\" src=\"https:\/\/images.cointelegraph.com\/images\/840_aHR0cHM6Ly9zMy5jb2ludGVsZWdyYXBoLmNvbS91cGxvYWRzLzIwMjEtMDQvZGFlZjM4YWUtYTlhNy00YzhkLTg1NjgtMDdmMTc4MGZlYTg2LmpwZw==.jpg\" \/><\/p>\n<div class=\"post-content\" data-v-5a136f3a>Over the last 12 months, the remarkable growth in decentralized finance has been driven by one thing: the ability of users to earn strong yields on their crypto assets by lending, staking and providing liquidity. Depending on your risk <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/download-scripts-themes-apps\/\" data-internallinksmanager029f6b8e52c=\"9\" title=\"Download Scripts &amp; Themes &amp; Apps\" target=\"_blank\" rel=\"noopener\">app<\/a>etite, gains from DeFi investments can run tens or even hundreds of times higher than standard returns in the traditional markets.<\/p>\n<p>Even if those kinds of yields don\u2019t last forever, DeFi offers significant promise to transform the financial markets in the long term. At the start of this year, former U.S. acting comptroller of the currency Brian Brooks predicted (I think, accurately) that \u201cself-driving banks\u201d would be a reality before self-driving cars will be able to fly.<\/p>\n<p>However, the growth of DeFi lending markets is currently hampered by one significant drawback: the need for over-collateralization of credit. We see this requirement deterring a large fraction of borrowers.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"By_size_reputation-backed_%3E_asset-backed_financial_systems\"><\/span>By size, reputation-backed &gt; asset-backed financial systems<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Traditional finance \u2014 from credit cards to dollars themselves \u2014 is largely backed by reputation and credit, not just assets. As individuals, we\u2019re assessed on our ability to repay a mortgage based on our credit history, not purely on the fact that we\u2019re already outright owners of real estate. Similarly, there are ways to assess the capital strength of corporate and institutional borrowers. These \u201creputation economies\u201d make up the majority of the traditional financial system, with which DeFi can and will compete.<\/p>\n<p>In the current DeFi landscape, over-collateralization is necessary partly because of the pseudonymous nature of blockchain transactions. A lender rarely knows a borrower\u2019s identity, which introduces an unacceptable degree of risk, as there\u2019s no way to guarantee repayment.<\/p>\n<p>Even on a pseudonymous basis, DeFi also lacks adequate credit scoring or borrower risk assessment mechanisms. So, making sure someone has sufficient \u201cskin in the <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/game\/\" data-internallinksmanager029f6b8e52c=\"7\" title=\"Game\" target=\"_blank\" rel=\"noopener\">game<\/a>\u201d is the only way to ensure they\u2019ll make good on their repayment obligations. In case of default, over-collateralized lenders can simply liquidate the borrower\u2019s collateral.<\/p>\n<p>The solution to bridging the gap between requiring assets and managing uncollateralized loan risk is simple. Ideally, the credit model is robust enough to support active lending rather than purely serving as a theoretical framework.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Structure_of_on-chain_credit_scores\"><\/span>Structure of on-chain credit scores<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>A key discovery is that zero-knowledge proofs allow for highly trustworthy on-chain credit scores without revealing confidential information about a borrower.<\/p>\n<ol>\n<li>The credit score is computed in a secure enclave (a special, highly secure computer chip).<\/li>\n<li>The credit score, as well as proof-of-computation, is uploaded to the blockchain.<\/li>\n<li>The proof-of-computation is verified by the smart contract.<\/li>\n<\/ol>\n<p>The credit score that\u2019s computed off-chain could include private information such as a borrower\u2019s assets, use of leverage and even Know Your Customer. None of this private information would be uploaded to the blockchain \u2014 just a proof of computation demonstrated that it was taken into account in the credit score in accordance with the protocol\u2019s design.<\/p>\n<p>This off-chain data could also be combined with existing protocol data such as repayment history. Creditworthiness can then be assessed, using a multivariable model, much like the current retail and institutional credit sector in traditional finance.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Portability_is_critical\"><\/span>Portability is critical<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>One of the most crucial considerations is that these credit ratings should be fully portable, and even composable (like DeFi Lego blocks), across different DeFi protocols and blockchains. This is especially important now that we\u2019re seeing new layer-one DeFi ecosystems starting to flourish on platforms such as Polkadot and Binance Smart Chain, which don\u2019t have the same on-chain history of lender and borrower interactions. Portability may enable existing lending platforms that currently require over 100% collateral to borrow to begin offering undercollateralized loans to those who have a rating that meets a minimum threshold level.<\/p>\n<p>Of course, such a system doesn\u2019t mean that we have to do away with overcollateralized lending for those without any credit history or reputation. However, the fact is that introducing reputation-based lending to DeFi will provide a massive boost to the ecosystem by making it appeal to a far broader range of potential users. It will remove constraints on the growth of DeFi lending, paving the way for more institutional involvement and boundless future expansion.<\/p>\n<p class=\"post-content__disclaimer\"><em>This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.<\/em><\/p>\n<p class=\"post-content__disclaimer\"><em>The views, thoughts and opinions expressed here are the author\u2019s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.<\/em><\/p>\n<div>\n<div style=\"background: rgb(239, 239, 239); border: 1px solid rgb(204, 204, 204); padding: 10px;\"><strong>Rafael Cosman<\/strong> is the CEO and a co-founder of TrustToken, developers of the definitive unsecured lending protocol TrueFi. Prior to TrustToken, Rafael helped build StreetCode, a nonprofit that teaches East Palo Alto youth technical skills, and worked at Google Brain, Palantir and Kernel. Rafael graduated from Stanford University with a Bachelor\u2019s degree in computer <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/sciencee\/\" data-internallinksmanager029f6b8e52c=\"5\" title=\"Science\" target=\"_blank\" rel=\"noopener\">science<\/a>. In his free time, you\u2019ll find Rafael reading or surfing.<\/div>\n<\/div>\n<p><template data-name=\"subscription_form\" data-type=\"defi_newsletter\"><\/template><\/div>\n<blockquote><p><strong><span style=\"color: #ff6600;\">If you liked the article, do not forget to share it with your friends. Follow us on\u00a0<span style=\"color: #ff0000;\"><a style=\"color: #ff0000;\" href=\"https:\/\/news.google.com\/publications\/CAAqBwgKMLG0nwswvr63Aw\" target=\"_blank\" rel=\"nofollow noopener noreferrer\">Google News<\/a><\/span>\u00a0too, click on the star and choose us from your favorites.<\/span><\/strong><\/p><\/blockquote>\n<blockquote>\n<p style=\"text-align: center;\">For forums sites go to <span style=\"color: #ff9900;\"><a style=\"color: #ff9900;\" href=\"https:\/\/forum.buradabiliyorum.com\/\" target=\"_blank\" rel=\"noopener\">Forum.BuradaBiliyorum.Com<\/a><\/span><\/strong>\n<\/p><\/blockquote>\n<blockquote>\n<p style=\"text-align: center;\"><strong>If you want to read more <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/news\/\" data-internallinksmanager029f6b8e52c=\"2\" title=\"News\" target=\"_blank\" rel=\"noopener\">News<\/a> articles, you can visit our <span style=\"color: #ff9900;\"><a style=\"color: #ff9900;\" href=\"https:\/\/en.buradabiliyorum.com\/general\/\" target=\"_blank\" rel=\"noopener\">General category.<\/a><\/span><\/strong><\/p>\n<\/blockquote>\n<p><span style=\"color: black;\"><a style=\"color: #ff9900;\" href=\"https:\/\/cointelegraph.com\/news\/defi-s-critical-missing-piece-credit-scores\" target=\"_blank\" rel=\"noopener\">Source<\/a><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>&#8220;# DeFi\u2019s critical missing piece: Credit scores &#8221; Over the last 12 months, the remarkable growth in decentralized finance has been driven by one thing: the ability of users to earn strong yields on their crypto assets by lending, staking and providing liquidity. Depending on your risk appetite, gains from DeFi investments can run tens&#8230;<\/p>\n","protected":false},"author":1,"featured_media":223710,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"fifu_image_url":"https:\/\/images.cointelegraph.com\/images\/1200_aHR0cHM6Ly9zMy5jb2ludGVsZWdyYXBoLmNvbS91cGxvYWRzLzIwMjEtMDQvZGFlZjM4YWUtYTlhNy00YzhkLTg1NjgtMDdmMTc4MGZlYTg2LmpwZw==.jpg","fifu_image_alt":"","footnotes":""},"categories":[1],"tags":[15047,74894,75239,74868,75141,74355,4965],"class_list":["post-223709","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-general","tag-privacy","tag-blockchain","tag-decentralized-finance","tag-defi","tag-kyc","tag-adoption","tag-technology"],"_links":{"self":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/223709","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/comments?post=223709"}],"version-history":[{"count":0,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/223709\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media\/223710"}],"wp:attachment":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media?parent=223709"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/categories?post=223709"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/tags?post=223709"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}