How is on-chain credit changing the crypto economy? James McGirk opines on how decentralized finance is using blockchain technology to gradually replace traditional finance functions, as part of CoinDesk TradingWeek, sponsored by CMEGroup.
The next cake on the griddle will be creditworthiness assessment, i.e., what Ethereum co-creator Vitalik Buterin and company are calling Web3’sA number of companies, including my employer,, are cooking up a solution: a credit score based on publicly available blockchain transaction data.
Eventually, as undercollateralized loans come online, you would be able to borrow and trade from decentralized exchanges and lenders without staking your own funds. Better yet, you’d be able to generate credit scores representing entire communities, letting you build a hedge fund with your buddies or borrow funds to build a block of apartments. Or you could always rent your score out.As unsavory as debt can occasionally be for a consumer, it accounts for a huge portion of the real economy.
DeFi uses trustless transactions on the blockchain. Trades between pseudonymous agents using DeFi applications are difficult to track, and that makes risk assessment and asset recovery nearly impossible for on-chain debt markets., when on-chain lenders didn’t need to worry about capital efficiency. But to continue growing and capturing evermore market share from traditional lenders, DeFi lenders need to accurately price interest according to risk, and eventually offer undercollateralized loans.