Credit scores have been a cornerstone of risk evaluation in the global banking systems for decades. They allow banks to determine who qualifies for a loan, at what interest rate, and what credit limits. Lenders use these scores to evaluate the likelihood that the borrower will fulfill their obligations and repay their loan.
The global lending and payments market reached $6.7 trillion in 2020. It will possibly reach $7.6 trillion in 2021.If you’ve ever applied for a bank loan, you’ll know that these traditional credit scoring systems and in-depth identity verification processes work together.
Popular DeFi lending apps like Compound and Aave have a trust problem. Because they collect no information on their participants, they are unable to make informed decisions on how much to lend, what interest rate to charge, and for how long the loan should be extended. Instead, they must treat all participants with the same level of risk, and thus require significant sums of collateral, in exchange for loans.
Today DeFi applications assume that the user has 0 reputation, mainly because they were developed around a pseudonymous ecosystem. For this reason they have to ask for liquid tokens as collateral, as there is no other way to enforce the future collection of the loan in case of default.
Unomi is an on-chain identity protocol at the center of the Kudo ecosystem. Credit Score is issued based on an on-chain analysis of an Ethereum address’ activity. Unomi essentially measures the on-chain activity of a user and summarizes it in a number.The model outputs an easy to understand 0–10 score that can be presented to users or integrated into other systems. By leveraging Unomi, it is possible for DeFi protocols to obtain the necessary information on their platform users and borrowers to determine creditworthiness, it allows crypto industry to provide under collateralized loans, matching the lending capabilities of centralized institutions while maintaining the decentralized ethos.
A Holistic Approach to Identity in DeFi
Credit Score:- Based on-chain credit history, repayment defaults etc,
Power User Score:- score defining user based on the volume/transactions supporting long term growth activity.
Hodler Score:- whether an address on-chain holds tokens or NFT’s showing support for long term growth
Farmer Score:- whether a farmer has a long-term mindset, as opposed to farming and immediately selling.
Airdrop Score:- whether an address on-chain holds airdropped tokens or NFT’s showing support for long term growth
Mercenary Score:- that signals to protocols how active a user is in the long term growth, Higher the mercenary score lower the activity.
We’re actively looking at new data points and methods to improve the utility of the score:
DeFi Lending today is very different: loans are all overcollateralized – so the value of the collateral is higher than the value of the loan If DeFi wants to expand beyond crypto native use case, loans may be offered not only on the basis of the collateral provided, but also on the on-chain reputation of the borrower.
We encourage the community to provide feedback on the methodology and get in touch