TransUnion partners with Spring Labs and Quadrata to provide credit scores for DeFi and Web3 apps. What it means for consumers looking to borrow from blockchain-based apps

But what exactly is blockchain, and how does this key credit information change how blockchain-based apps do business?

Blockchain and DeFi, explained

In short, a blockchain is a digital ledger shared across a network of computers. It consists of a series of blocks that contain data and are distributed throughout the network – making it difficult for hackers to change or tamper with the data these blocks contain. Blockchain is decentralized – meaning that the information in a chain is not controlled by a single company, bank or organization.

One of the key features of blockchain is its ability to preserve anonymity while maintaining a sense of transparency. The information stored in each block is encrypted and can only be accessed with a special key. Unlike centralized financial institutions, transactions are not tracked and stored by one primary entity.

Many decentralized finance (DeFi) applications use blockchain technology to provide financial services such as lending, trading, investing in cryptocurrencies and more.

“A DeFi app is different from other apps when it works and is accessible to anyone, anywhere, anytime through the basic use of an internet connection and without the mediation of traditional financial institutions,” said Gabby Kusz, CEO of Global Digital Asset & Cryptocurrency Association.

Maintaining this sense of privacy is important to most users on DeFi apps. However, this level of privacy can create problems when it comes to lending. Many lenders rely on your credit score and credit report as the basis for their decisions to take you on as a borrower, and blockchain technology makes it impossible to access this type of information.

How DeFi loans work

Unlike the process of filling out a loan application and sending it to your bank, borrowing from a blockchain-based app or platform works a little differently.

“DeFi lending works on the basis of smart contracts, and users can lend their cryptocurrency to a lending pool governed by the smart contract. The borrower can then access the pool and borrow cryptocurrency against their collateral. The terms of the loan, including the interest rate, security requirements and repayment schedule, are set in the smart contract, says Shant Kevonian, CEO and founder of EtherMail, a Web3 email solution for anonymous and encrypted wallet-to-wallet communication.

“On the privacy front, DeFi lending platforms typically do not require users to reveal personal information, such as their identity or credit score, as the loan is secured with the security of the smart contract. This allows users to maintain privacy while still accessing the benefits of decentralized lending.”

So how does Transunion shake things up? It gives the DeFi platforms a closer and more accurate look at your financial statistics without compromising your privacy.

Transunion provides credit score information to DeFi apps

TransUnion has partnered with Spring Labs and Quadrata to deliver off-chain credit scores to DeFi and Web3 applications (Internet applications based on public blockchains) for the first time. The credit data will be provided to these apps at the request of the consumer and will enable the delivery of credit scoring data while maintaining the privacy of the consumer’s identity on the blockchain.

With this information in hand, DeFi apps will be able to better assess the risk they are taking by lending to individual consumers, potentially giving consumers more favorable terms when they choose to borrow via a blockchain-based platform.

“As more consumers and lenders move to blockchain to conduct business, it’s important to ensure the balance is struck between the information lenders need to assess risk and the privacy and anonymity expected by users of the technology,” said John Sun, CEO . officer of Spring Labs in a statement. “This new product with TransUnion’s identity and credit data at its core is a big step toward achieving that balance and allowing more lending opportunities on blockchain while minimizing risk.”

TransUnion is currently the first credit reporting agency to take this step, but it could signal wider acceptance of decentralized platforms and lead to more consumers considering DeFi apps as a viable alternative for lending solutions.

“We see on-chain credit information as a key element for consumers to access more capital-efficient solutions in web3,” Lisa Fridman, president of Quadrata, said in a statement. “It is an important step in leveraging blockchain technology for important financial use cases in the future.”

The takeaway

Blockchain technology is still a fairly new concept and can be difficult to understand for many consumers. But as many large companies and financial agencies begin to embrace blockchain, it’s important to know how it works and how it could potentially affect you and your personal finances.