Credit scores have become an integral risk evaluation tool of Institutional finance. At its core, credit scores facilitate the streamlined evaluation of a prospective lender’s risk through a combined assessment of the prospect’s financial history, assets, and identity. The problem of over-collateralized loans in decentralized finance (DeFi) remains one of the hardest problems in the industry, largely because the traditional model of credit scoring in Institutional finance cannot be directly applied in DeFi. LedgerScore introduces a new strategy to resolve this disparity without compromising the ideals of DeFi.
While the transparency of blockchain transactions offer a path to incorporate the financial history and asset verification components of credit scores, solving the “identity problem” is more complexed.
There are a few problems with breaking anonymity for the purpose of retrieving legacy financial history:
1. Many around the world have been disenfranchised by the biases in Institutional finance. LedgerScore would like to offer an escape for those disproportionately affected by biases in traditional finance, such as women and minorities. At LedgerScore we believe that democratizing access to lending is the only path to financial inclusion.
2. The 2018 recession illuminated the failures in institutional credit scoring. Utilizing institutional finance data would mean we inherit their mistakes.
3. Utilizing institutional credit score data diminishes the integrity of a truly DeFi credit rating, while simultaneously reducing the possibility of future collaboration. LedgerScore aims to be the bridge between traditional finance and DeFi. In the future, we foresee users optionally utilizing their LedgerScores in Institutional finance, hence LedgerScores must be independent of legacy financial data to truly add value.
Ghost ID by LedgerScore
Ghost ID by LedgerScore allows members of the DeFi community to associate their collective financial identity across wallets and DeFi commitments onto a single, portable, dynamic, anonymous identity. It also allows them to verify, and assign ownership of these assets to their Ghost ID.
The LedgerScore Dashboard
The LedgerScore dashboard is a free service that gives users transparency into the interpretation of on-chain transactions relative to a their LedgerScore. It is also where they can create, manage and monitor their Ghost IDLedgerScore is working with several DeFi lending partners to create an open standard for communicating and contextualizing risks and positive actions from on-chain transactions. For partners the portal also provides a means of communication with Ghost IDs to provide offers as well as communicate with existing clients without breaking anonymity.
The future of LedgerScore and DeFi Credit ratings
In the future, a user with a Ghost ID will be able to collateralize their verified KYC in the form of a smart contract via a LedgerScore GhostSignature. This enables traditional forms of collection in the event of a default, while allowing a user to maintain anonymity if they don’t. Most importantly, it adds yet another mechanism for LedgerScore users to leverage their scores to receive better rates on DeFi loans.
For years, Institutional finance lenders have leveraged credit scores based on financial history, assets, and identity verification. Many in the crypto community have dismissed the possibility of credit ratings in DeFi because of its inability to incorporate identity and asset verification without compromising anonymity. With Ghost ID by LedgerScore this is now possible.