Building a Credit System for Cryptocurrencies

DeFi’s growing presence in our world is leading to many innovations, like staking and collateralized lending of cryptocurrencies. The natural flow of this is to develop a way to take the funds off the blockchain and use them in real world applications, like buying fuel or groceries. Sphere intends to innovate a credit card that bridges the gap. The card will be synced to a user’s wallets via a decentralized identifier, wherein a user’s credit limit is calculated from the provided wallet addresses. Sphere will procure these allowances from a treasury, which holds fiat and crypto currencies. Essentially, a user will accrue a balance from the treasury, and pay it back in whatever currencies they choose.

How Credit Systems Work

Current credit scoring computations rely on a three-party system which involves a creditor, a bureau, and a user. The creditor is the party that computes the score, given a user’s credit history from a bureau. A user’s role is to initiate the process, or to use their credit score, like when applying for a credit card or loan. Porting this model to web3 introduces a new and immutable party.

Have you ever had your account frozen while travelling internationally and been, quite literally, stranded?

How it could work:

In An Efficient Privacy-Preserving Credit Score System Based on Noninteractive Zero-Knowledge Proof by Kim-Kwang Raymond Choo et. al, the authors propose a four-party system requiring a Trusted Authority. In their example, the trusted authority generates an encryption system that each party can interact with, without revealing the messages to other parties in the model.

The Trusted Authority referenced in their proposal is a centralized server, but what if it could be a blockchain?

Their system consists of five steps to establish a credit score, if given access to a user’s credit history.

1. The Trusted Authority generates a primary security key pair after a user initiates the process.
2. The public key is sent to the Bureau, a contract who uses it to encrypt the requested history. The encrypted data is returned to the Trusted Authority.
3. The Trusted Authority then encrypts the data returned from the Bureau.
4. The Bureau’s double encrypted data is handed off to the Creditor for final score computation.
5. The encrypted final score is decrypted and returned to the user, through the Trusted Authority.

This system is perfectly applicable to current financial systems, by merely incorporating the blockchain as the Trusted Authority and developing contracts to handle interacting with the various parties.

Having calculated a user’s credit score through relatively normal means, what is to be done about the various wallets not accounted for in the Bureau’s user data?

Sphere’s proposed solution for this involves developing, or incorporating, a decentralized identifier (DID) system. Once a user’s wallets have been verified, the code will trace transactions through block explorers. Given that a user provided authenticated wallets, and a transaction history can be procured, Sphere is free to develop its own Credit Score Computation (CSC). Sphere’s CSC will allow us to generate an allowance for a particular DID.

Ultimately, Sphere aims to grant a DID inalienable from a tangible card. This DID will have a credit limit generated from Sphere’s CSC. The blockchain, being a ledger, will be treated as a Trusted Authority and Bureau, such that a crypto credit score can be weighed with a fiat credit score. Compounding the Crypto and Fiat credit scores into a single score will be the golden number that Sphere will use to calculate an exquisite line of credit for a user.