back to article DeFi credit scores: Coming soon to a blockchain near you

Web3, blockchain, and decentralized finance (DeFi) technologies, with their famously libertarian users, seem like the last places you'd expect to see a credit-scoring system. But money talks, even in a DeFi world. If you understand a traditional credit score, you understand the point of a web3 credit score: to ascertain …

  1. Ian Johnston Silver badge

    So, as usual, blockchain offers nothing which can't be done better, faster and cheaper by existing technology.

    1. Anonymous Coward
      Anonymous Coward

      I wouldn't phase that quite so absolutely. What it seems blockchain is entirely unnecessary for is a financial system with all the same functions as the existing system we are already accustomed to.

      However, if you're prepared to go without all the safeguards and regulations of the existing financtial system, and live in a financial Wild West, there are most certainly use cases not readily available in the current system - the rise of ransomware has shown such to be true. However most people, most businesses, and especially most governments, are not prepared to go without the safety nets.

      1. jmch Silver badge

        "What it seems blockchain is entirely unnecessary for is a financial system with all the same functions as the existing system we are already accustomed to"

        Except that the existing financial system is not ideal and can be improved, while existing blockchain-based financial systems can certainly be improved with safety nets from traditional finance.

        2 main issues with current model - a central currency issuing agency like a central bank can, and does, create currency at will, resulting in inflation that devalues everyone else's holdings. For the Keynsian model, a government is free to print as much money as it wants without consequence, which is clearly nonsense, since inflation devalues everyone else's income and savings. A pre-defined and unchangeable rate of currency issuing, as in the bitcoin model that limits mining, guarantees that the value of savings and investments cannot be inflated away. Some say that governments cannot work this way as it ties their hands too much. According to me this is highly desirable exactly because it limits government spending.

        Second main issue is the centrality of financial intermediaries who are both custodians and gatekeepers. On the one hand, having custodians of your money is a good idea unless we want to be walking about with huge amounts of cash, either physically or digitally. It's good that we can deposit money in a bank (physical or digital) where it is convenient and safe. But the custodian should have just one role - identifying the account owner, who can then move their money at will at their own discretion and without hindrance. If the custodian is also acting as a gatekeeper beyond these basics it can be a problem. Banks and/or governments can, and do, freeze people's accounts without the knowledge/consent of account holders, even when the account holders have done nothing wrong - eg banks in Cyprus and Greece in the last crisis. For those who say 'only in emergencies / extreme cases' - that's exactly when people need access to their money.

        1. fxkeh

          Inflation

          A small amount of inflation is a *good thing* in an economy. Inflation discourages hoarding of cash assets (because they loose relative value) over investment in businesses; encourages buying today over the future (when prices will be higher); and reduces the absolute value of debt. An economy with no inflation - or even worse, deflation, which is what many cryptocurrencies are aiming for - is a dead economy.

      2. Ian Johnston Silver badge

        Good point. I should have written "... offers nothing legal ...". Obviously it has been a godsend for the criminal community.

        1. doublelayer Silver badge

          There are legal things, but not necessarily legal things you want. Anonymous transfers across borders that move quickly aren't illegal even if criminals do use them, and I could see some cases where they could be desirable. For example, if you were sending money to a friend in an area where the existing financial system wasn't working, such as a war zone, you could accomplish it with cryptocurrency. I've never done that, it's likely you haven't either, and you may not be willing to allow the risks inherent in cryptocurrency so someone else can, but it would be legal.

    2. Anonymous Coward
      Anonymous Coward

      @Ian Johnston - Exactly

      After all this time, blockchain technology is still a solution searching for a problem to solve.

    3. EricB123 Bronze badge

      Well, not exactly

      "So, as usual, blockchain offers nothing which can't be done better, faster and cheaper by existing technology."

      But it does use a lot of energy.

  2. Bitsminer Silver badge

    monetizing bundles

    So, the New-Finance credit-scoring companies want to monetize your transactions, by analyzing "bundles" of your wallets and their histories.

    The traditional financial system knows this scheme intimately. Selling bundles of financial transactions and corresponding derivatives is big on Wall Street.

    See the film "The Big Short" for further details.

    "Bundle default swaps" is coming to a Web3 website near you soon!

  3. An_Old_Dog Silver badge

    Pointless "Safeguards"

    There is no valid reason for having any kind of cryptocurrency "credit score". Cryptocoins are not like a personal check -- once the coins are spent, the spender can't cancel the transaction or grab the coins back. Some people will object, "But what if the coins were stolen?". Well, what happens when cash is stolen? Do merchants refuse cash if the spender doesn't show you his/her credit rating? Of course not. Similarly, the objection, "But what about ransomware?" is pointless -- you already know the ransomware people are untrustworthy scum.

    This whole idea looks like an attempt to (1) de-anonymize cryptocoin users, and (2) for the personal-data-industry to grab even more personal data.

    Disclaimer: I have no financial interests in the cryptocoin craze, nor have I ever traded in cryptocoins.

  4. Anonymous Coward
    Anonymous Coward

    It could be argued that the reason why credit scores work is because of their centrality.

    Indeed it could. Most powerfully by people whose job is in centrally providing credit scores.

    The real reason credit scores work is identity(of course). Is the person seeking credit, the same person listed on the various elements of a credit score ? And that has as much to do with "centrality" as it does the font you use.

    And the inconvenient truth is central credit scoring isn't perfect to start with anyway.

    All of which being said, if one of the selling points of the cryptobros is anonymity, then credit scoring is the least of their worries.

    In fact credit scoring is an early example of trading privacy for utility.

  5. iron Silver badge

    So this will be yet another centralised point of control for "not actually decentralised at all" finance (notDeFi).

    LOL

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