A Deep Dive Into Rocifi
Written by Axel Wong, Jun Hong, Evanarp, matthew yuen
Introduction to Rocifi
Amongst the various protocols/narratives in DeFi today, lending and borrowing protocols are perhaps the most sticky and enduring. Although the Total Value Locked (TVL) across various DeFi protocols have, due to current market conditions, plummeted in value, money markets such as Maker, Curve and AAVE are still holding on strong with a combined TVL of about US$18 Billion.
Astute readers will notice that the aforementioned protocols are over-collateralized lending platforms which require the borrower to post collateral before taking out a loan. Notwithstanding the capital inefficiency inherent in such platforms (funds are usually idle within the smart contracts), over-collateralized lending arguably goes against the ethos and vision of Decentralised Finance; making finance and financial services truly accessible to anyone in the world.
The issues associated with over-collateralized lending in DeFi arguably spurred the rise of various unsecured lending platforms over time. The more popular protocols include Maple Finance, TruFi and Clearpool, with a combined TVL of about US$ 79 Million. However, without going into too much detail, these un(der)-collateralized lending platforms/protocols are targeted at institutional borrowers that create single-borrower liquidity pools. How about everyday retail?
Enter RociFi, a “decentralised credit economy with non-transferable, blockchain-native credit scores designed to facilitate under-collateralized lending”. Essentially, RociFi consists of an undercollateralized lending/borrowing protocol, supercharged with a credit scoring API that harnesses on-chain data and machine learning to facilitate the lifecycle of a loan that is taken out using RociFi.
RociFi appears to have a competent founding team, with its Co-Founder, Chris Brookins, being the former CIO and Founder at Valiendero Digital Assets, a firm that leverages Artificial Intelligence in cryptocurrency investments. RociFi is also backed by firms such as BlockVenture, Nexxo and Signum Capital. They launched in July 2022, and have had steady growth since, achieving a total number of 3256 cumulative loans and 20000 on-chain credit analysis performed.
In this article, we shall attempt to break down RociFi and see if RociFi lives up to its branding as one of the few protocols that cater to retail investors in the un(der)-collataralised lending space as opposed to institutional investors.
How Rocifi works
Getting started
Borrowers will first need to mint an NFCS (Non-fungible credit score) which will determine the access and rate to under-collateralized loan. Borrowers will be able to link one or more addresses to their credit score. The NFCS proves ownership of the address bundle that the borrower wishes to be credit scored.
Process of borrowing and lending
In case you’re not familiar with the process of borrowing and lending, here is a basic summary:
1.) Borrower mints non-transferrable NFCS token for one or several Ethereum addresses they own.
2.) The borrower requests a loan and Bonds are created by the Payment contract
3.) The Investor contract buys these bonds
4.) Upon purchase of borrower’s bonds, the Investor releases DAI to the borrower
5.) Loan repayments are made to the Payments contract, in DAI, and the Investor collects DAI payments from there and distributes it to Lenders
6.) Investor contract burns bonds as payments are made and the Collateral Manager proportionally unlocks collateral
7.) For the lender, they deposit DAI into a lending pool & receive the respective lending pool’s Debt Tokens
8.) As the borrower repays DAI Loan to the Payments contract, the bonds are burned.
9.) The Lender receives interest payments in DAI via payment contract
Implications of credit score
Rocifi’s credit scores are based on risk of the borrower, meaning the lower the better. Having a low-credit score (1–6) gives borrowers access to under-collateralized loans while a higher score limits borrowers to over-collateralized loans. A full breakdown can be found below:
How the credit scores are calculated
Unlike TradFi credit scoring that fundamentally evaluates credit risk based on the reputation of the borrowers, Rocifi takes on a more holistic approach. The main pillars of the credit analysis process are:
a. Trustworthiness: Is the borrower willing to repay the loan?
b. Creditworthiness: Is the borrower able to repay the loan?
c. Reputation risk: Does the borrower have something to lose in the event of failing to repay the loan? (Borrowers will be doxxed if that occurs!)
The credit scoring algorithm tracks data across several EVM-compatible chains (Ethereum mainnet, Polygon, BSC, Avalanche and Optimism) to predict borrower’s creditworthiness.
Improving credit scores
Although the algorithm is not open-sourced to prevent exploitation from bad actors, these are some recommendations to lower your credit score
- Bundle multiple wallets with long transaction histories (at least 200 days)
- Ensure addresses in NFCS have previous interactions with Defi protocols
- Connect addresses with strong web 3 reputation (i.e linked to social graph or blue chip NFTs)
- Successful and repayment of Rocifi loans
How liquidation works
Liquidation is a concept fundamental to lending protocols. When collateralized assets are sold to cover a debt, liquidation occurs. This usually happens when the value of overcollateralized assets fall below a minimum threshold above the value of the loan. In that instance, the liquidator buys the assets at a discount to its market value and pays the lender the full debt.
In Rocifi’s case, the first and simplest liquidation strategy is liquidation by the protocol. In this case, collateral from the insolvent borrower is sold for the underlying asset and acquired debt tokens are burned.
The second strategy is liquidation by a 3rd party. In this case, delinquent loans can be repaid by anyone, not just a borrower. So, for example, if Bob’s loan is overdue,
Alice can send a request to liquidate it. After repaying the loan at a discount dependent on how far out from maturity the loan is (the further out the greater the discount), Alice can grab Bob’s collateral.
Borrowing & Lending
Lending pools
Rocifi plans to have pools that contain the underlying asset/risk class ERC-20 debt token and corresponding asset token. For 10 risk classes and 3 assets there will be 30 pools.
For example, rDAI3 corresponds to DAI asset pool and risk score 3 debt token.
Currently, Rocifi only has 3 lending pools which are bucketed based on risk e.g. credit score 1–3 (low risk pool), 4–6 (mid risk pool) and 7–10 (high risk pool).
On the Rocifi app, these pools correspond to Under-Collateralized pool 1, Under-Collateralized pool 2 and Over-Collateralized pool respectively.
Retail lenders can only deposit into the:
a.) Under-Collateralized Pool 2 and
Anonymous borrowers with strong on-chain activity, transaction and borrowing history are served by this pool. This pool issues 30-day fixed interest loans. Annualised, lenders can earn 24–36% in gross yields. Given the 10% protocol fees, and assuming 98% repayment rates and 80% utilisation, net yields are 16.9–25.3%.
b.) Over collateralized pool
This pool serves any type of borrower, and gross interest of 12–16% are earned by lenders. Here, net yield calculation is simpler, as we do not need to consider repayment rates. Therefore, net yields are between 8.6–11.5%.
Current Borrowing & Lending APR
Currently, we see that at 75% utilisation rate and 90% repayment rates, the projected yields for the Under-Collateralized Pool is 10.94%. If we back out the protocol fees of 10%, and assume 100% repayment and 100% utilisation rates, then we arrive at gross yields of 18%, which is currently lower than the targeted 24–36% gross yields.
Similarly for the Over-Collateralized Pool, the projected yield of 4.05% at assumed utilisation rates of 75% implies a 6% gross yield on assets lent. This too is lower than the targeted range for this pool.
The main reason for this could be due to the lower credit appetite in crypto, with short term T-Bills outpacing even simple leveraged Aave/Compound stablecoin yield farms. A look into the historicals of the 3 pools is required to understand if this discrepancy between yields are systemic or protocol-based in nature.
Effective APY
Using the same picture above as reference, current effective APYs can be calculated by considering the current utilisation ratios. Hence, we arrive at EAPYs of 1.54% (18% x 3.86k/40.67k) and 0.12% (6% x 764.17/33,780). For comparison, Aave and Compound’s lending (in-kind) APYs are 0.92% and 0.82% respectively, at today’s utilisation ratios of 47% and 38% respectively.
How Rocifi compares to its competition
- Total Value Locked
The Rocifi TVL stands at USD $97,403 (DefiLama) as of 26 October. Compared to its competition, where giants like Aave or Maker have TVLs of $4.2B and $8.15B respectively, Rocifi is still in its nascency phase.
The reason for the relatively low TVL can be ascribed to the cap on the borrowing amount. At the moment, the max borrow amount for the under-collateralized loan is 500 USDC. For the over-collateralized loan, it is 10,000 USDC.
The loan caps are set low as Rocifi refines their credit scoring system.
2. Recourse when there is Loan Default
Protocols like Maple Finance, TrueFi and ClearPool resort to legal solutions when there are defaults. In the case of TrueFi, when Blockwater Technologies defaulted on its $BUSD 3.4 million loan, although the Protocol preferred an out-of-court solution, it eventually culminated in a “court-supervised administrative proceeding” to maximise recovery for $BUSD lenders.
In contrast, RociFi utilises a “social recourse” approach where, because borrowers are not subjected to KYC requirements, they are instead subjected to “reputation destruction” where wallet addresses and other relevant information will be doxxed on-chain and to the RociFi community with the desired end-goal of shutting the defaulter away from DeFi possibly for good.
The effectiveness of such a measure, as opposed to legal solutions, is predicated on the assumption that there is or will be a mass influx into DeFi from TradFi and therefore there is massive value in protecting one’s on-chain reputation as it becomes intertwined or becomes one with a person’s off-chain in-real-life identity.
As with the current state of DeFi today, it is difficult to envision that “reputation destruction” will be a sufficient deterrence to loan defaulters-to-be. It remains to be seen whether such a method will prove to be a sufficient safeguard against loan defaults even in the future where DeFi could gain more market share from TradFi.
3. Credit scoring system
Rocifi protocol is the first lending protocol to issue on-chain credit scores interoperable with all web3.
They recently launched their NFC API which can be used by DeFi protocols as a cross-chain interoperable non-transferrable NFT-based identity solution for:
- Enabling under-collateralized loans
- Protecting from fraud and scam
- Using NFCS-based reputation for Sybil resistance in DAO elections
- Balancing DAO voting power according to NFCS reputation
- Prioritising airdrops and waitlists to quality users
There is still much to be said about the effectiveness of the credit-scoring system but what separates Rocifi from other credit scoring protocols is that Rocifi provides the credit scores for loans AND issues loans based on those credit scores.
In Rocifi’s point of view, credit scoring protocols have it all wrong. “ How is one supposed to issue credit scores for under-collateralized loans without actually issuing those loans? This equates to providing advice without penalty in the event it’s incorrect.”
Unlike these protocols, it is in Rocifi’s interest to ensure an effective and accurate credit scoring system so that default rates on under/over collateralized loans are kept at a minimum. In other words, Rocifi’s interest aligns with their communities’.
Based on this premise, their on-chain credit scoring system could be seen as a more credible system and could increase its adoption among other web3 protocols.
How Rocifi earns revenue
The Rocifi protocol earns revenue through collaterals. The collateral manager contracts have access to significant funds as they handle borrower collateral and invest it in various platforms to earn a yield for the borrower.
The protocol takes 10% of the yield and 90% goes to depositors/lenders. All revenue is owned by the protocol and eventual DAO; not the team.
Growth Projection
Taking a closer look at RociFi’s stats on DefiLlama, there might be some concerns as to the protocol’s future growth as the TVL sits at just US$ 96,763 as compared to other un(der)collateralized protocols like Maple Finance (at US$ 22 Million) and TrueFi (at US$ 42.4 Million).
According to Rocifi’s co-founder Chris Brookins, the low TVL is due to the cap imposed onto the amount that one can borrow, with the maximum amount for under-collateralized loans at a mere 500 USDC and over-collateralized loans at 10,000 USDC. The purpose of the restrictive caps is to refine the machine learning system of the NFCS credit scoring system.
It is important to note, however, that ROCI, the governance token of the RociFi ecosystem has not been launched, with “utility and token launch time is TBD”.
That being said, looking at RociFi’s whitepaper, it is envisioned that ROCI is a staking asset that enables token holders to convert ROCI into vexROCI. vexROCI will allow holders to be entitled to 15% of RociFi’s revenue, governance voting and early access to new products. As with the current state of DeFi, if there isn’t any token or coin for retail to “ape” into, it is not unlikely that the protocol in question does not get much attention/usage.
Moreover, there are caps imposed on the amount that one can borrow, with the maximum amount for under-collateralized loans at a mere 500 USDC and over-collateralized loans at 10,000 USDC.
Lastly, for fairness, comparison in terms of TVL or Volume shouldn’t be made against the likes of Maple Finance or TrueFi, as although all these protocols belong to the unsecured lending space, Maple Finance and TrueFi caters to institutional borrowers which naturally means that the amount borrowed and TVL would vary quite differently.
Growth Narrative(s)
Firstly, it is arguable that RociFi is in the nascent stages of its growth as can be seen from, among others, low cap on loans, no governance/utility token (yet) and the inability to exchange RociFi’s debt tokens on external Automated Market Makers. The true potential of RociFi can only be said to be in sight once RociFi is “fully launched” and when the loan caps have been lifted.
Secondly, RociFi stands to be cross-chain and interoperable by virtue of its proprietary Non-Fungible Credit Score NFT. As this credit scoring system is off-chain, anyone can call this API, harness and apply the benefits of RociFi’s credit analysis to a wide variety of solutions and platforms such as, but not limited to, prioritising certain wallets or addresses in whitelists/airdrops, identifying malicious or fraudulent addresses and of course, enabling un(der)-collateralized loans in other Defi protocols.
In an article penned by RociFi’s Co-founder Chris Brookins regarding the Ukraine crisis, he demonstrated how, though RociFi’s fraud analytics technology, a seemingly good-willed donor of cryptocurrency to Ukraine actually came from a fraud actor in the DeFi space who used 4 intermediary addresses in order to make the donation.
According to Dune analytics, only 10% of users who minted have a score of 6 and below and are eligible for an under-collateralized loan. This can potentially explain the low TVL and the number of loans taken since an under-collateralized loan is out of reach for most users.
Whilst the team will not want to lower the difficulty of the NFCS credit scoring system, the team can continue to introduce updates such as the bundling of multiple wallet addresses for the minting of NFCS, which was introduced in July this year. Such updates would serve to bridge the gap between a user’s actual credit worthiness and their NFCS score. The team can potentially look into bundling addresses across different chains. Such an approach would also be consistent with RociFi’s desired state of DeFi; an environment where access to credit is democratised for all, including those that operate on multiple blockchains.
Risks & Risk Mitigation
Centralisation risks
Each asset-storing contract has a built-in circuit-breaker to allow protocol admin or DAO to pause it and disable any transfers. While the purpose of these circuit breakers is to mitigate security risks, it does present a possibility of censorship.
It is also worth noting that the top borrower on the protocol has an outstanding loan of 25,520 USD with the 2nd top borrower with a mere outstanding loan of 513 USD. This implies that the loans taken on the protocol are vastly concentrated with the top borrower.
To mitigate management-related issues such as administrator mismanagement and concentration of voting power, every contract with admin access utilises multisig.
This means that no one person can access or make changes to smart contracts, they can only be accessed in consensus with the other ‘key holders’.
Rocifi also plans to move to a DAO after the mainnet launch. The end-goal for DAO governance is for users to become the ultimate owners and managers of the platform
Market risk
Manipulation of off-chain credit score may enable attackers to create scam loans while manipulation of on-chain price feed can force protocol to liquidate loans and result in a loss of customer funds. RociFi has partnered with Chainlink for access to industry standard price data feeds to facilitate calculation of the loan collateral price in real-time.
In case of an oracle exploit, the protocol admin will use a circuit breaker to prevent serious losses. Limits per borrower also ensures several malicious borrowers won’taffect liquidity in a large way.
Conclusion
Indeed, from the above, it appears that RociFi has quite a few novel features, most notably its credit-scoring system, that makes it stand out from other un(der)-collateralized lending protocols or platforms. However, in our view, it remains to be seen how much of RociFi’s innovation will lead to an increase in the number of Active Users on the protocol for the following reasons.
Firstly, as a young protocol, RociFi’s credit scoring system suffers from a chicken-and-egg problem. In order to determine whether RociFi’s innovative credit system is truly effective at deterring would-be defaulters and whether the “social recourse” mechanism is superior to traditional ways of recovering debt, RociFi needs a good amount of Active Users. However, as of now, the sample size of borrowers as well as amount borrowed is much smaller than the likes of Maple Finance and TruFi (though we have acknowledged that these protocols shouldn’t be compared directly). Consequently, this contributes to uncertainty as to the effectiveness of their credit scoring system.
Secondly, we think that RociFi is not very attractive as a borrowing platform. As seen from the diagram taken from the White Paper, the Borrowers that will have access to fully uncollateralized to 50% collateralized loans are Institutions, DAOs and High-Reputation Retail Borrowers. However, it is arguable that such entities or persons will have access to other bigger and more established platforms that would have higher levels of liquidity. There might not be a sufficiently good reason for them to utilise RociFi for loans.
That being said, we are hopefully optimistic for RociFi’s future. There are plans for RociFi’s platform token to be released, and for the protocol to transition to a community-led DAO. A future where we see RociFi’s NFCS being used and bringing value to multiple chains and across the broader DeFi ecosystem can certainly be envisioned. If DeFi continues on its path to “eat” TradFi, along with the broader narrative that the ethos and value system of Web3 would slowly replace Web2, we see no reason why someone’s on-chain reputation cannot be so valuable as to take the place of traditional asset-based collateral, paving the way for RociFi to be the one of the biggest sources for DeFi financing, especially for retail investors that may not have access to large amounts of collateral unlike institutions/DAOs in order to meaningfully participate in the lending/borrowing ecosystem.
Disclaimer: This article does not constitute financial advice.
References
https://dune.com/OllieF/borrowing
https://blog.roci.fi/how-lenders-can-earn-with-rocifi-4593611de16b
https://compound.finance/markets/USDC
https://defillama.com/protocol/rocifi
https://blog.roci.fi/rocifis-audit-results-and-improvements-11d22c34ffd9
