Credit Scores Possibly Coming to DeFi

Credit Scores Possibly Coming to DeFi

By johnwege | johnwege | 17 Jul 2020

The cryptocurrency world is bullish and in a frenzy for anything DeFi right now.  During the last few months a large number of Defi coins have gone up several hundred percent in terms of market cap.  This has caused the market to search for the next Defi coin to rise, or investing in any coin that has anything releated to Defi.  But this is a new market, and with new markets comes great risks.  There have been software exploits, and there is also the risk of people defaulting on their loans. And companies are wanting to make this a less risky place. 

If you don't know what DeFi it; it is used for lending and trading, including derivatives, using the Ethereum network’s smart contract technology instead of third parties providing centralized software.

But in breaking news for the Defi industry, the decentralized lending startup Teller has received $1 million in seed funding that will go towards building the first algorithmic credit risk protocol for DeFi.

I know after reading that, maybe many of you actually groaned in disgust, after-all, isn't this just more of the old banking world that we were trying to escape actually coming back to us?  

I think the answer to this is yes and no.

“True success for DeFi requires entering mainstream appeal; we need to stop building in a vacuum. In a trustless environment, unsecured loans are tough to architect but necessary for the evolution of DeFi. Current proposed solutions of ‘shared credit lines’ only dilute risk, rather than create true user accountability.”

The solution will interact with legacy credit scoring systems, like Equifax, to provide aggregated data into the DeFi lending markets. Parafi Capital and Maven11 Capital also participated in the investment round.

After learning of this news, I was a little disappointed as well, because I find the banking world, and everything to do with credit scores to be quite corrupt.  In some ways tricking people to go into more debt.

But we must also admit that currently there is quite a bit of risk in the Defi loan space right now.  If there was a credit score attached to you, this could affect how much money you could take out in a loan, and making it a much less risker endeavor for everyone else. Which could potentially prevent people from losing all of their money.

At the end of the day I think the regulations/rules from the legacy system will definitely follow us into the market, especially as the market becomes larger and larger.

So what do you think of this news?  Does Defi need credit scores, or some other regulation to make it a less risky endeavor?

As always, thank you for reading!



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