Mar 15, 2021
Decentralized Credit Rating Is Integral To DeFi Adoption
A byline by Erick Pinos, Ontology’s America’s Ecosystem Lead
By Erick Pinos, Advisor at Wing, a credit-based cross-chain DeFi lending platform built on Ontology, and Ontology’s America’s Ecosystem Lead
The total value locked in DeFi projects is an estimated $38 billion, while CoinMarketCap estimates that the total market capitalization of DeFi tokens is nearly $70 billion. For reference, $70 billion is nearly the same amount as the entire GDP of Luxembourg, and more than the respective GDPs of Bulgaria and Croatia, per statistics from the World Bank. In short: DeFi is massive, and expanding by the day. Its expansion over the last few years has seen the advent of new technologies and better ways of managing finances: new ways of financing projects, borrowing, lending, betting, investing; the possibilities are endless. The rapid growth of DeFi has, however, highlighted some innate problems in the industry, most notably when it comes to credit scoring. It was for this reason that we developed Ontology’s OScore protocol in 2020, a self-sovereign credit evaluation system based on user data stored on the Ontology blockchain.
For years now, lending and borrowing offers individuals a vast array of new opportunities in which credit scoring plays an integral role. This makes OScore a vital missing piece to the DeFi’s puzzle, because in order to offer these products, this vital data is required so that they can be assured the purchaser or borrower will be reliable and in a position to repay them.
In traditional finance, the cross section between off-chain and on-chain assets and actions is not adequately established to allow users to benefit from on-chain actions while keeping their personal data safe when it comes to credit scoring. Most platforms require access to the user’s off-chain information, while their on-chain data provides insight to the platform into the user’s credit history. This is what we are solving through OScore.
By using OScore, users can access DeFi products and services, projects, dApps and blockchain platforms, and also manage their on-chain credit data at their will. This allows users to utilise their credit history; if a user has a positive credit history, they can utilise this data to obtain access to more rewarding financial products without placing the safety and security of their data in jeopardy. Users can also amalgamate their on-chain and off-chain credit scores to formulate a more accurate depiction of their credit score with which they can achieve even greater access to high quality financial products. Banks can also have access to quality data that provides them with a full picture of who they are lending to.
Enter, Wing.
With nearly $158 million currently in total value locked, Wing is a force to be reckoned with. Based on the Ontology blockchain, Wing allows users to integrate their amalgamated on-chain and off-chain credit scores, or in this case, their OScore, into Wing’s credit evaluation module. Every product pool available on Wing can then allow users to verify their own credibility, while using OScore to increase the credibility of the individual Wing product pools.
Pertinently, by using OScore with a user’s credit rating, each user can avoid over-collateralization, especially when they are looking to borrow from a variety of different digital asset classes. The higher their OScore, the more benefits they can glean when borrowing, such as reduced rates and additional incentives. The better the user is at engaging with and participating in the project, the more incentives they receive. For example, if a user borrows and is now making monthly repayments on time, they may enjoy additional OScore points as a reward.
At Ontology, not only are we proud of our efforts regarding OScore and Wing, we believe decentralized credit scoring is a necessary next step in bringing decentralized finance into the mainstream. Data safety is of increasing importance to consumers; that is undeniable. To achieve mass adoption, we must as an industry first guarantee that. Secondly, if the industry wants to become on par or fully engage with traditional finance, we must adapt to give traditional financial institutions some of the assurances and ability to carry out due diligence, while giving consumers the peace of mind traditionally offered by large financial institutions, such as ease of access and credit scoring.
By utilising decentralized credit scoring that ensures the safety and security of user data, we are in the unique space of getting the best of both worlds. Thanks to Wing, it is now easier than ever before to see the full picture of an individual user’s financial history.
None of this comes at the expense of each individual’s right to privacy; only information that is absolutely necessary will ever be shared with a party that needs it. These assurances are crucial in winning over the trust of the general public, end users and traditional financial institutions. It will take an all-of-industry approach to achieve these goals, and we are proud to be paving the way.
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