The next trend of DeFi, credit data outside the chain will make DeFi explode on a large scale?

The main problem facing DeFi today is: only people in the small circle are using it, but not many people outside the circle are using it. Without tokens, the general public cannot stake assets as collateral and thus cannot lend assets from the platform. On the other hand, if ordinary people want to use platforms such as Curve to earn interest, they cannot do so, because such DeFi platforms only accept digital assets. Ordinary users can't get it if they want to enter.

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A common question is: Should DeFi be compatible and interoperable with existing financial infrastructure?

It is foreseeable that this topic will become one of the core focuses of DeFI-related discussions in the near future. Can Financial Applications Scale With Data Constraints? What important role will traditional financial institutions play in the transition?

When discussing this issue, perhaps the history of e-mail development can give us inspiration. After the birth of e-mail, traditional postal services have not been eliminated. On the contrary, the user scenarios of traditional post offices have changed, and they play an important role in express delivery and important document transportation.

Similarly, even if DeFi develops and grows in the future, traditional financial institutions will not be out. On the contrary, DeFi needs to rely on traditional finance to take root and gain mass adoption. Entrepreneurs in the field of traditional finance and DeFi spreads will be able to obtain large-scale users and provide highly cost-effective services.

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Two recent developments in DeFi projects are worth mentioning.

One of them is Aave's release of a credit agency product, which is an unsecured lending facility. Messari reports: Depositors can provide assets like USDT to Aave as usual; however, instead of withdrawing deposits themselves, they entrust credit to borrowers. This allows borrowers to borrow from Aave without providing collateral.

The mechanism of the unsecured loan agreement is: the authorizer and the borrower will negotiate through the OpenLaw legal agreement to ensure the enforceability of the agreement.

Simply put, users who own cryptocurrencies can serve as the ultimate guarantor for third parties to provide support for unsecured borrowing. A line of credit extended to others is secured through an OpenLaw legal agreement, which is, at least in some jurisdictions, legally binding.

Although this method is new and still controversial, the existence of this type of product is still important. Why?

First, it allows individuals who are willing to take third-party credit risk to make loans while holding the underlying assets. This is useful in a high-trust environment where individuals are willing to take the risk and the borrower pays back what they owe in the future. A possible user scenario is: in a company that mainly works remotely, it runs entirely with the help of on-chain transactions.

For example, a decentralized exchange accumulates digital assets by charging transaction fees, and these assets may appreciate in the future. Exchanges can use those assets as collateral to provide employees with a short-term loan to buy a Tesla or buy an Apple computer. In this way, employees do not hold digital assets, but can obtain loans with the help of digital assets mortgaged by exchanges.

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Another interesting project is the recently launched Teller Finance (Teller Finance).

The San Francisco-based company raised $1 million in funding to connect data from traditional credit bureaus with the DeFi ecosystem.

As proposed in the project white paper, the system will use remote cloud-based nodes to retrieve data and run credit risk algorithms. What services can users get?

This means that individuals will be able to pull transaction data from their bank's API and run an open-source algorithm to verify their credit through Teller Finance's platform. They can also add traditional credit bureaus and income information verification sources to the mix.

Depending on the risk parameters involved, different credit limits will be calculated by the Teller platform and the level of collateral required will vary. Risk parameters are used to monitor the user's cash flow, account balance, and legal authority to verify the possibility of user repayment.

Every document must be cryptographically signed and, where required, stored in a GDPR-compliant manner, Teller claims. Teller's product model would require users to agree to have regional collection companies contact them if they fail to pay on time. The process of debt collection is consistent with the method used by the traditional financial industry to collect bad debts.

While Teller Finance will design its own liquidity pool that can automatically transfer funds, I think the company will build its own moat by building a credit score for the app.

Because: capital is cheap, information is not cheap.

What's more, startups may need to verify users' credit scores, but are unwilling to accept the responsibility of collecting these credit score data. The source of Teller's funds is likely to come from institutional funds, as long as they can get more returns than banks, they are willing to take longer to get their funds back. In return, they gain access to a vast swath of the world's underserved borrowers. People who are chasing returns on DeFi are unlikely to be those users who put funds into Teller's fund pool, because these DeFi users will hope that they can withdraw their funds at any time to find higher returns.

If platforms such as Teller and Aave are combined, users can obtain liquidity from multiple channels. In the above, we gave an example of a company that mainly works remotely. No matter how much employees earn, they may not be able to get loans locally.

future development

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Of course, some people will question the idea of ​​this article. One point that stands out is that the existing credit bureaus are very inefficient, and after experiencing the COVID-19 outbreak, many data sources have been compromised and problems have arisen. And here’s the thing: DeFi can tap into multiple data sources to provide individuals with new credit scores.

Therefore, traditional credit institutions such as Experian can continue to operate as usual, and over time, open source algorithm platforms such as Teller will gradually come in handy to provide alternatives.

Future financial applications can run using multiple data sources with the help of the security and verifiable features provided by blockchain technology. Provernance Blockchain is a ready-made example.

I wouldn't be surprised if in the future service providers use Chainlink to get data to assess the risk of lending to individuals. It won’t be long before we see off-chain collateral such as real estate being used in DeFi products as well.

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Will traditional lending services be replaced?

Will this new way of DeFi become a substitute for traditional loans?

Probably not. But it empowers individuals to have a bank-like infrastructure that can collect credentials, verify credentials, and pay loans.

The changes brought about by the democratization of infrastructure are slow at first but incremental. This is very similar to AWS. Amazon's cloud service AWS provides the infrastructure, which greatly reduces the cost of starting and expanding the scale of start-ups.

What Aave and Teller Finance are creating is not the final application itself. In emerging markets, there will still be a need for entrepreneurs to build applications on top of this, as these two teams may lack the necessary knowledge to provide loans in niche markets. What's more, without a physical presence in the region, it will be difficult for them to communicate and collect debts.

The upside for enterprising individuals is that global pools of capital can be tapped to meet regional needs. There will be its own risks, but nothing can be set in stone. If the world had been waiting for loans to be 100% guaranteed before doing business, most of the commercial bond market wouldn't exist today.

Looking back at the history of exchanges, it is clear that they tended to start out as centralized. From Coinbase to Binance, then to IDEX, and now to Uniswap, the process of decentralization is slow and gradual. Start with centralization and gradually succumb to slow and steady change. We can foresee that in the future on-chain lending track, how to evaluate users' credit ratings through data will face a similar development process.

In the decentralized arena, entrepreneurs are beginning to explore what is the best way to serve users, and huge market opportunities are waiting for them to discover.

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original:https://cipher.substack.com/p/off-chain-credit->