Why do we need a crypto credit score in DeFi?

Published in

SmartCredit.io & ChainAware.ai

4 min readOct 14, 2020

What is a Credit Score?

Traditional finance is using credit scores extensively. For example, you might have heard about the FICO score in the U.S. Other countries have similar scoring mechanisms. Or the commercial banks have developed their scoring mechanisms. Better credit score results in better prices for the borrowers and vice versa.

A credit score is something very usual in traditional finance.

Is DeFi using Crypto Credit Score?

DeFi, on the other hand, is anonymous. There is no data about the users except their public blockchain history.

What does this mean? It means that there is no way to separate good borrowers and bad borrowers. Every borrower has to be considered as a potential scammer who wants to steal the lender’s funds. As DeFi borrowing products use minimal means of credit-risk management, then very high collateral ratios are used.

Very high collateral ratios mean low usability for the borrowers. It implies that their capability to borrow is little. Conversely, if collateral ratios would be lower, then the borrower’s ability to borrow would be higher.

However, these high collateral ratios are used for all the borrowers — the DeFi products cannot separate between good and bad borrowers. This results then in the suitable old “one shoe fits all” model.

What is the added value of the Crypto Credit Score?

The Credit Score would allow us to separate the good borrowers and the less good borrowers. The good borrowers would get better conditions on the platform and vice versa. The excellent borrower would have a much higher capability to borrow than the not-so-good borrowers.

There will always be freedom of choice:

Those who do not want to use the DeFi credit scores and wish to stay fully anonymous — can do so. However, this might mean that they will face higher collateral requirements.
Those who prefer to open up their data and go through the credit score procedure — can receive much better conditions.

Some DeFi platforms will not integrate credit scoring. That’s OK, so — the users who wish to stay fully anonymous will consolidate on these DeFi platforms.

Some other platforms will integrate credit scoring — and the good borrowers will get better conditions on these platforms. Moreover, it means that a sub-set of borrowers start to migrate to the platforms with the credit-scoring. It means as well that they will get better conditions than the users of the other platform.
It will be freedom of choice. Those who want to stay fully anonymous can do so, but they have to pay for this privilege with higher interest rates and collateral requirements. On the other hand, those who are ready to open up their data — will monetize their data, and they will receive better conditions.

How is SmartCredit.io calculating the Crypto Credit Score?

SmartCredit.io is using proprietary technology for this. It has the following components:

Blockchain analytics — as the blockchain history is public, similar analytics will be run on the blockchain as commercial banks are doing on their client’s transaction histories. This results in the “capability to borrow” parameter
Social media analytics — SmartCredit.io asks users to open up their social media (Facebook and LinkedIn account). Of course, the users can choose not to open up these accounts. However, this data is feeding into the “willingness to pay” parameter
Psychometric test — SmartCredit.io ask users to complete a psychometric test. This feeds as well into the “willingness to pay” parameter
KYC — which is optional on the platform, but will be required from specific transaction volume

In the end, the data is combined, the analytics engine will do some numbers crunching, and this results in the user’s credit score.

How is SmartCredit.io using the Crypto Credit Score?

SmartCredit.io has the Loss Provision Fund. The credit score determines the payments into the Loss Provision Fund. Good “credit-scores” will have to pay less into the Loss Provisions Fund and vice versa.

Additionally, SmartCredit.io offers better collateral ratios for the users with the right “credit-scores” and vice versa.

What does this mean? Straightforward — the people ready to open up their data will receive special conditions on SmartCredit.io. It’s the way how everyone can monetize his data.

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