“If you want to know the value of money, try borrowing some!” — Benjamin Franklin
Decentralized finance (DeFi) has become an important part of the cryptocurrency industry. DeFi emulates many of the same tools as traditional finance (TradFi), but with greater efficiency and without the need for middlemen. However, their use is limited by the inherent risks that come with its anonymous and decentralized nature. Similar to the role that credit ratings play in TradFi, there is still a lack of solutions for managing risks within the crypto space. CreDA, the crypto credit rating agency, offers a solution for building trust in the industry while also serving as a connector between DeFi and TradFi. One of the key components of CreDA’s unique service is what they call the Credit Network (cNetwork).
Who Needs CreDA and Why?
The great American Benjamin Franklin said: “If you want to know the value of money, try borrowing some!” Without a credit history, there is no mechanism for lenders to trust your ability to pay them back. This significantly limits your access to convenient capital. Over the past 20–30 years, the financial services industry has become more complex. Banks and financial organizations have begun adopting new technologies such as Big Data, machine learning, and artificial intelligence to reduce the risks associated with people’s increasing amounts of data. But many consumers don’t understand what information goes into their credit scores or why they are negatively penalized. Often, the data credit agencies have is wrong, skewed, or based on a mistake the consumer made years ago keeping the disadvantaged in a negative feedback loop while rewarding the privileged.
Cryptocurrencies appeared as an alternative to the global financial system. Despite their high volatility, they attract consumers with the possibility of making payments and transactions without a trusted third party, i.e. cheaper and faster.
However, the potential for DeFi to create a more equitable and open financial industry is held back by the lack of trust that is inherent in a ‘trustless’ system. And similar to TradeFi a hundred years ago, credit ratings can provide that trust for the evolving world of DeFi.
The Role of Decentralized Identifiers (DIDs)
CreDA manages to maintain a person’s anonymity while also ensuring they can be trusted with the combined use of their Credit Oracle and DID technology. The Credit Oracle uses machine learning to assess a person’s on-chain activity and assets when they link their wallet. A DID is a permanent identifier on the blockchain that leverages the properties of distributed ledgers by creating a tamper-proof and transparent way to prove that an entity is who they say they are. This doesn’t require any personal information and allows the individual to maintain control of the data that is associated with the DID. So when a Credit NFT is minted with a person’s Crypto Credit Score and their DID, it provides DeFi platforms with the requirements they need to offer low or even no-collateral loans.
The Credit Network built on Social Graph Data
Through the use of the DID, Credit Oracle, and the functionality of the cNFT, CreDA’s Crypto Credit Score is based on five key attributes: on-chain assets and their volatility; on-chain activity, behaviors, and preferences; risk profile based on things like the ability to pay back a loan; credit history; and most recently, social graph data. This info is minted into a cNFT along with the DID so that it can be adopted across various applications. When a certain protocol accesses a specific cNFT with a user’s permission, the blockchain’s transparent and immutable nature allows the user’s status to be reflected in their Crypto Credit Score.
This is one of the qualities that differentiates CreDA from traditional credit rating agencies. Because it is decentralized and enabled through blockchain technology, CreDA’s score is a real-time score. As a user engages other Web 3.0 platforms, trades assets, joins DAOs, etc. their DID informs the CreDA Oracle which then adjusts the score appropriately.
Through recent partnerships with CyberConnect and Project Galaxy, CreDA now takes a user’s social data into consideration. These partnerships allow users to achieve higher credit scores based on their social network. When a user opts to include social graph data, the CreDA Oracle understands if someone belongs to a trusted peer group, which can positively affect their score. Users can also build an instant guarantor network as part of CreDA’s Credit Network (cNetwork). It allows people with strong Crypto Credit Scores to essentially lend their credibility to peers who seek better rates.
In a press release announcing their partnership with CyberConnect, CreDA CEO, Fakhul Miah said:
“CreDA is more than just a Crypto Credit Rating service. We see it as the trust architecture that will underpin the entire Web3 ecosystem, across DeFi, SocialFi, GameFi, and the metaverse at large. By incorporating social graph data, we can begin to build a more cohesive picture of a person’s credibility. And because people own their data, they can put it to work through our cNetwork. This is just another way that we are redefining how risk and creditworthiness are scored and how it can be used to provide more freedom and opportunity for people who need access to capital.”