Decentralized Credit Score: Determining a user’s credit score in a decentralized web is not always an easy task. This is because privacy is embedded as a key principle of the crypto industry. Therefore, lenders have to use things like on-chain transactions and observable off-chain activities to measure creditworthiness.
But it may also be stretching the definition of “decentralized lending”. This often results in users revealing more information about themselves than is necessary. Now, that may be starting to change.
Polygon has launched Polygon ID, a decentralized and private identity service for Web3 and DeFi. The identity platform uses zero-knowledge (zk) cryptography – a technology that can prove the validity of data without revealing any other personally identifiable information.
“It provides a privacy-first means for users to verify their credentials and identity in Web3 without storing data with centralized third parties,” Amit Choudhary, head of DeFi research at Polygon, told BeInCrypto.
“The ID is linked to documents such as a passport or driving license to confirm the true identity of the user. This information is then cryptographically secured on the blockchain using a hash function that obfuscates the data,” he said.
Chowdhary said those who want to verify a user’s identity can do so but cannot see any personal information.
However, big tech has failed to secure personal information in the past. There has always been a concern with private firms collecting biometric data in a crypto industry that in large part continues to operate outside regulatory oversight.
Decentralized Credit Score: Redefining DeFi Creditworthiness
A credit score determines the interest rate at which lenders can lend you money and with what limits. In traditional finance, the score represents a number derived from an analysis of your personal history including income and even love life.
The number is usually issued by a central authority such as a credit bureau. But things are a bit different in Decentralized Finance or DeFi. A booming sector with over $200 billion in total value of crypto assets locked in 2021.
As the name suggests, there is no central authority in DeFi. This is a deliberate design to remove the middleman that encourages peer-to-peer (P2P) transactions. But the simple plan had unintended consequences – how to define credentials while maintaining confidentiality.
Observers say lenders have had to deploy a variety of tools such as on-chain transactions and off-chain activities to measure creditworthiness. Still, it doesn’t really fully address the issue of a reliable credit rating system for a decentralized ecosystem.
At times, users have been forced to reveal more information about their personal lives than necessary. Furthermore, the lack of trust in DeFi means that lenders are more careful about who they lend to. Often demanding obscene amounts of collateral.
This may be the reason why the loan-to-value ratio in decentralized finance is always high at around 50%. This means that anyone borrowing $1,000 would have to post $2,000 in collateral. And continue to do so if the value of their borrowed assets has fallen in order to avoid liquidation.
Amit Chowdhary claimed that Polygon ID, the so-called personal identity layer for Web3 apps, could make decentralized credit scoring possible and easier. He shrugged off concerns about intrusions on user privacy, something that has crippled Worldcoin’s global currency ambitions.
“While (Polygon ID) uses biometric information for verification purposes, that data is not provided to anyone unless the user gives explicit permission,” he said, adding:
“Putting users in control of their identity and personal data is one way to enable social cohesion and take power back from third parties.”
But some experts in bitcoin and crypto are not impressed. They talk about the risk of fraud and the lack of real safeguards on the collected data. Analysts point to the threat posed by Polygon ID on privacy and decentralization as an affront to bitcoin’s founding principles.
“In general, the principles of zero-knowledge cryptographic techniques allow you to worry less about your personal data,” Nikita Zuborev, principal analyst at ramp crypto to fiat exchange BestChange, told BeInCrypto.
“But the issue of leakage from a certain ‘certifying authority’ is also relevant. The proposed zk-proof only perpetuates the problem of insufficient privacy for public registries. Which is a blockchain, but an organization still receives personal data.”
“Your data will be shared, albeit publicly, without the ability to match wallets and track your activity in the community in the future,” he said.
It’s inevitable that comparisons have been made with WorldCoin’s ill-fated plan to scan the ire of a billion people in exchange for free money. The project was widely criticized as a disaster for harvesting people’s biometrics in an unethical manner.
Echo Levin, founder and CEO of crypto investment platform Midas Investments, expects Polygon ID to be “really transformative in the mid to long term.” However, it must first address lingering issues about trust.
“While the innovation is impressive, it may still face unique resistance from its target users,” Levine told BeInCrypto.
“Polygon ID products are intended to help people unify their identities and protect them from unauthorized third parties, [but] It will take a lot of education for the public to understand its true value proposition.
Alexander Tkachenko, founder of VNX, a European platform for tokenized precious metals, told BeInCrypto that Polygon ID is “not compatible with current rules and regulations.”
“So interaction with centralized players cannot be avoided if the system is to work and be accepted outside DeFi,” he explained.
“There are several initiatives trying to resolve the paradox, most notably OneBoard in Liechtenstein, but it is a difficult issue to resolve.”
Decentralization is a major aspect of cryptocurrency. This removes the need for a central authority to determine what is valid data and what is not. This means that there is no single point of failure, be it technical, ethical or political.
At present, there are hundreds of thousands of “honey pots” for hackers in every database. This includes user data that businesses around the world have stored, according to observers.
“A perfect world would eliminate the need for these easily exploitable centralized data silos.
self-sovereign-identification solution [like Polygon ID’s] Web 3 and digital business have the same future, Simon Schaber, chief business development officer at DeFi protocol Spool, told the publication.
Polygon Head of DeFi Research Amit Choudhary said he expects “logging in with your Polygon ID to become a reality soon” as more websites start removing social logins from their platforms for privacy reasons.
He also revealed that “our technology is being integrated into an upcoming ‘nothing’ smartphone release.” He hopes that the identity system will also become part of the DAO’s infrastructure, replacing the token-based voting mechanism.
“Voting rights can also be linked to merit, credibility and affiliations depending entirely on how much capital you have,” he added. Polygon (MATIC) is a layer-2 protocol on Ethereum.
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