1 min read

Your crypto credit score

As discussed recently, loans on blockchain are typically either overcollateralized or entirely uncollateralized. This is due to trust. Overcollateralized loans are used because lenders don't have to trust you to repay the loan. They'll be paid either way. Uncollateralized flash loans work around trust because you won't even be issued a loan unless you repay it in the same transaction.

But real world debt isn't so impersonal. Lenders know who you are. They decide whether or not (and at what interest rate) to lend you money based on your trustworthiness and how you plan to use the money. Most real world debt is un- or under-collateralized. You're taking out the loan because you don't have the money you need available to you.

Credit scores are how banks determine if you're trustworthy. There are various dApps working on bringing this kind of traditional lending to blockchain. You can just pull existing credit score data on-chain, but that creates a centralized dependency on the traditional finance world.

Blockchain-native undercollateralized loans are coming. The main difference from traditional finance will be decentralization. You have to separate the credit rating bureau, the underwriter, the lender, etc. and reward individuals appropriately for performing these roles well. Loan defaults will be an issue of course, but it's much harder to send an anonymous wallet to collections.

Any reputation system that enables this kind of lending on blockchain will have broader implications as well. Your reputation is a resource, much like money and time. I believe we'll see new innovations and ways for you to spend/leverage your reputation on blockchain.


P.S. One of the more obvious options is limiting access to network resources based on reputation. This would serve the same function as gas fees and mana, but using a new resource for preventing spam.