The macro importance of credit availability cannot be undermined from the fact that capital infusion has induced economic transition for ages. Lending, as a catalyst for capital availability, is one of the most intricate services rendered by banking & financial institutions. Traditional credit facilities are an integral part of the existing financial system and are usually in the form of loans, advances, discounted bonds & overdrafts. There are some conditions, a system used by lenders to gauge the creditworthiness of the potential borrower, which must be fulfilled by customers before such facilities are granted popularly known as canons of lending; The Five Cs of Credit:
- Character - reflected by credit history
- Capacity - assessed through debt to income ratio, primarily
- Capital - liquidity that the applicant possesses
- Collateral - to secure the amount of a loan
- Conditions - Purpose, scope & interest on loan etc.
DeFi by definition intrigues liberty and demands curtailing age-old practices as present in traditional lending markets. Therefore, the mechanisms for establishing the above mentioned, ‘The Five Cs’ have to be coded in the spirit of decentralization while maintaining utmost financial standards pertinent for scalability.
DeFi as an evolving financial system and as a technology spectrum now stands at the crossroads of identity assessment, credit scoring (borrower’s evaluation), and collateralization. While the size of the lending business has overshadowed almost everything else in DeFi space, new mechanisms around credit evaluation, credit delegation, and collateralization are evolving at a lightning speed. These are different parts of the evolution system that EasyFi is trying to solve by the final goal of the adoption of DeFi.
Let’s take a look at statistics that defines the current lending space in DeFi. The most popular benchmark, ‘ Total Value Locked’ or TVL in the lending protocols, at the time of writing, is $3.74 Billion. That reflects the current size of the market and the potential upside to it. Another important factor is the collateralization ratio which stands at an average of 196% average (Source: Loanscan.io) which means for a loan of $100 you need to put $196 worth of collateral. While the collateralization ratio has improved from 349% in December 2019 to 196%, for markets to scale, we believe, we need to achieve the most efficient collateralization ratios to induce borrowing activities as it directly impacts the cost of the loan.
Another important benchmarks namely character, capacity, capital & conditions (of,’The Five Cs’) demand availability of historical information pertaining to the user. To achieve the above-stated benchmarks, DeFi needs its own version of identity assessment and borrower’s evaluation mechanisms. We believe the absence of such standards is a great barrier to scalability and a hindrance to attaining a sizable market in comparison to traditional financial markets.
In the past, self-sovereign identity platforms have tried to create standards to improve the collateralization ratios through the implementation of social risk distribution, Zero-knowledge proofs, and Credit DAO’s but have thus far had little traction.
At EasyFi we plan to tackle this by enabling under collateralized loans using individual credit scoring built by TrustScore (a product of Koinfox.com). More details on Koinfox TrustScore can be read here
EasyFi through TrustScore empowers a user to whitelist an ERC20 address for assessing DeFi as a market. Activities such as supplying assets, borrowing assets, repaying, defaulting (liquidation by LPs) are done through the very whitelisted ERC20 address which produces a standardized Credit Score (Similar to Experian, CIBIL).
This TrustScore empowers users with more borrowing capacity with lesser collateralization requirements over a period of time. EasyFi through TrustScore, we believe, shall revolutionize lending markets by establishing user’s creditworthiness further clearing many roadblocks to scalability and adoption of DeFi.
More details on the Under-Collateralization and relationship with TrustScore will be released as we hit nearer to the product release. Stay tuned for all important announcements on our telegram channel and join the official group. You can also follow us on twitter