What is a cryptocurrency score?

The problem with traditional cryptocurrencies is that you can not get a loan without more than enough liquid capital to cover it.

By and large, decentralized finance projects (DeFi) only offer loans with security to the average consumer. To borrow $ 1000, you need to set up $ 1250 to $ 1500 in crypto. The main point is to get liquid capital without selling assets you think will grow in value over time.

However, “reliance on collateral also limits access to credit for borrowers who are already wealthy, negating the benefits of financial inclusion,” the Bank for International Settlement (BIS) wrote in June. Although it is necessary when the borrower’s identity is unknown, it loses the potential to democratize finance and help those who are on the edge or outside the traditional economy to grow wealth, BIS said.

This is where the cryptocurrency score comes in.

A relatively new phenomenon, cryptocurrency scores are in some ways quite similar to the traditional credit scores issued by TransUnion, Equifax and Experian: They take into account cryptocurrencies, transaction history, spending habits and asset growth over time. And they can be used by both DeFi lending protocols and FinTech borrowers to provide unsecured loans or lines of credit.

Personal experience led Masa Finance founder and CEO Brendan Playford to launch a cryptocurrency scoring company. Playford noticed that he grew up poor, and found himself without a credit score of any kind, despite having made good money on mining crypto.

What’s inside?

The problem is that a traditional FICO credit score “currently does not take into account any of the existing cryptocurrencies that I have had for the last seven or eight years. My specific portfolio is weighted against assets in the chain – I am a thin file outside the chain.”

Masa takes this information and adds data from many other sources – including traditional credit scores – and creates points “for people who traditionally cannot score outside the chain.”

It is far from the only company that does this.

Credit DeFi Alliance, or CreDA, launched a rating platform in November, which uses artificial intelligence (AI) to look at transaction histories. It then creates an NFT token with a user’s credit score that can be used by DeFi borrowers to assess risk, so that the smart contract managed platforms can offer loans with little or no security with personal rates and services that are more competitive.

Others also combine online and offline data. TransUnion has partnered with digital identity provider Spring Labs to add its data to ky0x Digital Passport. Teller, another cryptocurrency lender that builds its own results, works with Equifax as well as online data.

These cryptocurrency scores are not just for individuals either. Another company, TrueFi, builds a cryptocurrency score for its own lending that requires corporate borrowers in the crypto industry to provide data on things like compliance, accounting systems, corporate structure – often a source of concern in the crypto world – and experience with principles, combining it with data including repayment history for loans, assets under management and exposure to influence and other risks.

RociFi uses machine learning to assess things like participation in decentralized autonomous organization (DAO), NFT ownership and even social media account data to build a score focused on loans with collateral.

Who are you?

Identity is a key problem for unsecured cryptocurrencies, and not just for compliance with anti-money laundering. Cryptotransactions are inherently pseudonymous – any transaction is open to anyone to view on a blockchain, but users’ identities are hidden behind an alphanumeric wallet address.

See also: Crypto Basics Series: Is Bitcoin Really Anonymous and How Can Law Enforcement Track It?

In many ways, issuers of cryptocurrency scores operate as reliable third parties of the type bitcoin and crypto in general should make unnecessary. They collect information from people, who must provide identifying data and access to the details of their inventory.

This allows point issuers to both access credit information without having to view and examine potential borrowers’ crypto assets and transaction history, and offer a source to debt collection agencies if a lender defaults.

This is especially important in DeFi lending, where no centralized management conducts such a review. This can be used as an oracle – to provide yes or no information to companies asking if anyone meets these requirements.

The ultimate goal, said CreDA Chief Operating Officer Cassie Zhang, is to “fulfill the promise of blockchain and decentralized finance, and provide the trust architecture needed to unlock capital for billions of people without access to traditional banking.”

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