We started ChainScore with the aim of addressing one of the most important limitations in Decentralized Finance (DeFi) right now, which is Financial Risk Evaluation. This is mainly due to the unavailability of multi-chain [or cross-platform] credit information which makes DeFi protocols unable to make informed decisions on risk management and treat all participants with the same level of risk.
This is where ChainScore comes in as a middleware — to broker the credit information, form risk analytics, and submit the data back to the smart contract/blockchain. We gather credit data from financial transactions on multiple chains and submit the analysed data in the form of Credit Scores for users, Ratings and Credit Reports for assets/investments, or different risk parameters which would be used by applications to manage risks.
DeFi is limited right now, and ChainScore is bringing value that we’ve been missing to build more structured or secondary markets in DeFi which are not currently possible due to unknown risk and no risk management protocols. We are bringing a similar risk infrastructure from Traditional finance to DeFi, with verifiable and secure data that could be trusted in a decentralized and transparent way.
Let’s take a look at one of our offerings “credit scores” which is based on the users’ past transactions, credit history, and cross-platform reputation, examples of standard risk management metrics.
Credit scores have been used for decades in global banking systems for risk evaluation. This is what helps the banks and institutions make informed decisions to be more profitable and offer better loan terms. More importantly, they are a metric of trust and verify the eligibility of their customers.
We see Lending/Borrowing as the main use case to enable markets and DeFi products for a more normalised set of users, which hasn't yet caught up due to over-collateralization and regulation.
Moreover, credit scores are not used just for banking transactions, we see them used at several other places such as—
- Landlord checking tenant’s credit score before renting you a house to make sure whether they can pay the rent on time or not
- Employers also check your credit score before hiring employees
- Insurance companies also check the consumer’s credit score to decide whether they should insure them and at what rate they should give them the insurance
We believe the use of credit scores would also enable access to reputation to build trustful secondary marketplaces in the metaverse.
Identifying and analysing potential risks that may negatively impact accounts, assets, and/or the application, probability of occurrence
- Market risk: Relates to incurring a loss due to things like market volatility, hikes in interest rates or costs, fluctuation in values, etc. These risk factors lead to under collateralization of loans, and impermanent losses due to market volatility of the crypto assets used as collateral. We further divide Market risk into — Interest rate risk, Token risk, Equity risk, Valuation risk, Volatility risk, Systemic risk and Model risk.
- Credit risk: Evaluating the probability of the borrower failing to pay back to the creditor. Lending Protocols incur credit risk by extending credit to customers, due to the possibility of them defaulting on payment.
- Centralisation Risk: Verification if the token/pool is really decentralised, by checking the number of investment/asset holders and their association. Can any individual or group impact a user’s investment by manipulating oracles, administrative controls, or emergency measures? Centralisation risk tried to cover scams leading to rug pull or dumping from majority holders and Ponzi schemes. ‘Centralization issues’ are the biggest culprits of DeFi attacks: Certik
- Technological risk: We analyse several technological parameters. What portion of the code has been audited by reputable firms? Has formal verification been performed? Is the code open source? Is a bug bounty offered? Ensuring all the above measures builds up trust and assurity, that the protocol would be safe from Code Exploits or Thefts
With the above parameters and their probability, we calculate the severity of the value of their consequences. With that we provide, Risk Ratings — which would be used to analyse a more complex range of assets such as Liquidity Pools, Funds, Tokenised Assets, or just applications in general.
Using this Risk Analytics would open up a wide range of DeFi markets, that are not currently possible due to Unknown Risks. The following could be a few use cases:
- Lending/Borrowing using credit scores to verify users. Based on this, the platform could keep the lending pools safer and provide better interest rates for users with good credit history
- Trading Debts/Bonds on Secondary Markets
- Risk Rated DeFi Markets, Marketplaces, Hedge Funds, and much more
- Tranching Assets based on Risk
- Diversifying lender/investor’s portfolio based on Risk
- Building crypto-native indices
DeFi has seen massive growth in 2020–21 when it was almost 10x to 100B. We believe that this high growth is going to be resulting in new and innovative markets and assets which were not earlier possible due to the unavailability of credit risk management.
We have also seen 2021 to be the peak for losses in DeFi totalling up to 12 Billion USD. We thrive to minimize these losses by providing credit ratings and tools for risk management, making DeFi safer.