DID: Improvements to on-chain credit operations and DAO identity

AAVE recently launched the stable currency GHO and mentioned the credit scoring system in the route, which brings on-chain credit back to people’s attention: will the unsecured credit loan, which was mentioned a long time ago, become popular? This is not the case. The credit scoring system, which is the basis of credit, still faces many problems. The infrastructure of DID is advancing slowly, and DAO, as an independent economic entity, does not have an identity paradigm that is different from that of retail investors. Problems such as identification and recovery are currently unsolvable.

As a potential credit scoring solution, how will DID improve the expansion of DeFi through credit business, and how will DAO, a potential new customer range of DeFi, be included in it. This article will discuss the potential improvements of DIDs to DeFi credit operations and how the financial identity of DAOs determined by DIDs will affect DeFi.

Three Characteristics of DID: Different from the Root of the Existing Identity System

DID is not a copy of the real social identity system. The identity value system on the chain is fundamentally different from the real identity system, which is determined by the three characteristics of DID. DID has three characteristics of low consensus cost, composability and native globalization, these three characteristics stipulate that DID will bring new rules instead of duplication of the old system.

Low consensus cost

  • Fast and efficient verification
  • Any information can be uploaded to the chain, with a wide range

composability

  • Mutual calls between protocols
  • One identity can enjoy all the benefits of the ecology

native globalization

  • Naturally without borders, it naturally meets the needs of transnational credit value transfer
  • The global division of labor knows no borders and naturally covers a wider group of people

The consensus of DID itself is formed by the underlying public chain. A sufficiently decentralized public chain has solved the consensus problem. The DID system built on it does not need to consider consensus, and the key behavior data is directly recorded on the chain. form a consensus. The DID protocol and between the DID protocol and other protocols can be called each other, and the control authority is completely determined by the user, which gives the DID protocol a very large composability, and the DID protocol can be easily accessed to other applications. , information transmission without barriers. This gives users ownership of their own data, users can authorize the protocol to call any type of data, and the protocols can be combined with each other.

DID does not require a trusted entity to operate, so it is naturally borderless, and users can naturally access their on-chain credits to various applications, regardless of where the applications are registered . In the follow-up development, whether DID will be regulated due to compliance issues is still unknown. In theory, DID meets the needs of cross-border credit value transfer and can realize borderless value transfer. The realization of DID has a certain idealization, and it is difficult for large-scale applications not to access the identity and data under the chain, but DID can at least broaden the scope of identity and solve many problems of global division of labor, such as the global employment of DAO organizations.

The perfection of DID for DeFi

DID solves the identification problem of DeFi, which is the pain point of DeFi. Without being able to judge and measure the credit level of users, we can only increase the mortgage rate of all users and over-collateralize. Combining DID to launch a credit scoring system to achieve low mortgage rate or even unsecured credit loans is generally considered to be the next development direction of DeFi . As an economically independent individual, DAO also needs an identity paradigm. If DID creates this paradigm, it will also bring a new range of customers to DeFi, and various on-chain financial operations will be easy to implement. DeFi A base point of rapid expansion will be found.

The large-scale expansion of DeFi will inevitably compete with traditional financial services for market share, and a type of financial service that cannot access the credit system cannot reduce the mortgage rate. Without access to the credit system, DeFi cannot reduce the mortgage rate and improve its own capital utilization efficiency , which will be a huge obstacle for DeFi to achieve large-scale expansion. Judging from the loan business with a high proportion of DeFi, the large-scale unsecured credit business at this stage only exists in the institutional business, with a small scale. At this stage, the development of on-chain credit is still early, and there is still a certain distance from the ideal credit business . The popularization of DID will reduce the cost of information collection and will be an indispensable part of future credit business. As the ideal customer of DeFi, DAO does not have an identity paradigm at this stage to adapt to the characteristics of DAO. DID will determine this paradigm and bring a new range of customers to DeFi.

An idealized credit business and the financial identity of a DAO

The operation of an idealized credit business includes three dimensions: before, during and after.

  • beforehand
    • Gather information such as repayment history, proof of income, guarantees, etc.
    • Investigation and risk assessment, verification of information.
    • According to the credit model, evaluate the probability of default, determine the applicable interest rate, mortgage rate and credit limit, etc., plus subjective judgment, determine whether to issue credit.
  • in the middle
    • The scope of use of funds is stipulated, and the operation of traditional financial service providers is to set up special accounts.
    • Risk Management.
    • Fund monitoring.
  • afterwards
    • Recovery, liquidation of collateral.
    • Credit history, limiting the scope of services for customers.
    • Backtest the adjusted model.

The idealized identity paradigm of a DAO in finance should be similar to a corporate legal person in the real world, with independent property rights and independent exercise of commercial rights.

  • independent property rights
    • Control is public, and no independent entity can control the DAO’s treasury treasury, but a deterministic governance method that determines how funds run.
    • Most assets and liabilities are on-chain and can be chosen to be public or not.
    • The business is sustainable, the members are mobile, and it is an independent brand that does not depend on an individual to exist.
  • Independent exercise of commercial rights
    • Independently exercise commercial rights and have commercial credit.
    • Independently undertake business responsibilities.

On-chain credit business dilemma at this stage

The scope of credit business can be roughly divided into retail users and institutions according to the scale. For institutional credit business, the scale is large and the profit is high, and financial service providers are motivated to spend more costs to collect information. For retail customers, financial service providers The cost of collecting information is high, and the time and effort spent on collecting information are limited. TrueFi is the first unsecured credit platform that operates in a decentralized manner, and it is currently the largest one. It currently only engages in institutional business, and its customers only have more than ten institutions.

Its business model is that users put TUSD into the fund pool of the TrueFi platform, borrowers in need submit applications, and after the credit rating is reviewed by TRU pledgers, the TRU fund pool approves the loan. In this process, TrueFi’s whitelist review and TRU stakers’ votes play a decisive role, but TRU stakers’ judgment is largely based on the TrueFi credit score given by TrueFi’s credit model. Therefore, the model’s The core is TrueFi’s strict whitelist review system for borrowers in advance and a built-in credit model .

DID: Improvements to on-chain credit operations and DAO identity

TrueFi business flow chart (data source: TrueFi official website)

Due to the inability to collect and judge customer information on a large scale, TrueFi chose a strict whitelist review system to screen out institutional users with a low probability of default and can be recovered off-chain. TrueFi is also participating in the construction of on-chain credit scores by building its own credit model. When we consider the conditions for TrueFi’s large-scale expansion, we can clearly perceive the bottleneck of the development of the credit business on the chain at this stage, that is, the large-scale user identification problem and the recovery problem .

Although many DID projects intend to solve the problem of user identification in the financial field, it is still at a very early stage, there are some problems with various protocols, and there is currently no protocol that is widely used. Recovery issues include whether DID should be included in off-chain identities and data, as well as practical issues. LTO Network is a hybrid blockchain platform. He designed an on-chain identity credential system at the bottom layer, choosing to link real-world data to enhance the commercial availability of on-chain identity. This is a path . After adding off-chain identities and data, real users can be confirmed in reality, but at the same time, some new problems will arise. For example, once a small customer default occurs, it is difficult to pass the practical operation legal or other means to recover. Whether the future DID will be included in the off-chain identity and data is still unknown, but DID alone cannot solve the problem of recovery.

Improvements in DID

DID can improve many aspects of credit business through credit scoring system and basic information.

  • Prior information collection and subjective judgment
    • DID is mainly used to complete the information collection link in advance of credit business. In the on-chain environment, users’ information is read through the credentials and data recorded by DID to initially evaluate users. For example, the user’s historical repayment records, on-chain activity records, social connections, etc. can be used as initial information for DeFi protocol evaluation.
    • Through the behavior data recorded by DID (interaction with certain protocols, participating DAOs, etc.), DeFi protocols can also allow salesmen or pledgers of certain Tokens to make subjective judgments and assist decision-making.
  • In-progress fund locking and fund monitoring
    • Combined with DeFi, DID can specify the purpose of funds and ensure the whereabouts of funds through customized on-chain contracts.
    • On the chain, you can monitor the flow of funds from time to time, record the behavior in the event, reflect it on the DID, and provide metadata to the DID in the event.
  • post credit history
    • In the event of a default, the information is recorded on the chain. In a well-established DID ecosystem, it will affect the benefits that can be enjoyed in the future, and directly affect the next credit application. It is a means to deal with the default after the fact. If the impact and consequences of the default record are strong enough, it can form a constraint on the borrower, but this depends on the construction of the entire ecology.
  • Scenarios that cannot be improved
    • Off-chain recovery and accountability: DID alone cannot solve the recovery problem, which involves off-chain collection, legal affairs and many other problems that are difficult to achieve on the chain, and it is not the key that DID wants to solve.
    • The collection of off-chain data: Accessing off-chain data means trusting an entity, and this is the weak point of DID. How to interact with off-chain data is still the current difficulty.
    • On-chain collection: On-chain collection is difficult to achieve, and it is difficult to recover after the loss occurs. DID’s credit scoring system only reduces its default motivation, but does not solve the collection problem.

The DAO financial identity determined by DID can improve many problems in DeFi. This new range of customers also requires DeFi to provide financial services, because such DIDs naturally cannot be integrated into the financial system of the real world, and it is difficult for traditional financial institutions to The framework for serving DAOs has been developed in time, which means that only DeFi can provide these DAOs with the on-chain financial services they need.

  • User identification problem
    • A properly functioning DAO should have abundant on-chain data, which is the basis of credit.
    • DAO’s economic activities can provide support for its credit. Similar to companies in the real world who use future cash flow as repayment support, DAO’s economic activities will theoretically be continuous and predictable to a certain extent.
  • Financial Recovery Issues
    • DAO’s credit record is very important, it directly affects its own brand value and the credit of all members, which is a constraint for DAO.
    • The default of DAO can recover its future cash flow and even intangible assets.

DID’s current exploration

credit scoring system

There are many DIDs exploring the mining of financial data and exploring a credit scoring system that can be generally applied. At present, DIDs that provide financial services mainly rely on a certain protocol, such as TrueFi, Maple Finance’s credit score The model relies on its own lending business and retains a whitelist review. Other DID protocols that focus on credit scoring will connect to mainstream lending protocols, and give on-chain credit scores through the repayment records of mainstream lending protocols. For example, ARCx will give credit scores based on the interaction between users and DeFi protocols.

If the DID protocol wants to make a breakthrough in financial identity, it needs to solve the problem of interacting with off-chain data. The current DID protocol does not have good support for off-chain data. Linking to social media is only a small part of off-chain data, especially In terms of finance, social data is not very meaningful. How to interact with a wider range of off-chain data will be the direction that DID will explore, and the coverage of off-chain financial data will help DID go further in the construction of financial identity.

The DAO’s Financial Identity

At present, there is no DID protocol dedicated to providing financial identity for DAO, and this paper believes that there will be a huge demand for regulating financial identity for DAO. A DID identity system that adapts to the characteristics of DAO will determine the DAO’s assets and claims in a certain paradigm, so as to realize the various financial operations mentioned above . From this point of view, the identity system will also be dominated by finance. In general, the organizational form of DAO needs a financial paradigm and is determined by DID.

At the same time, in the development of DAO, its members will also face problems similar to DAO. The real world is slow to respond, and a full-time DAO member has difficulties accessing real-world financial services. DAO is employed globally, and its identity may not be recognized locally, and it is difficult to obtain credit loans such as housing loans in traditional financial services through its own on-chain income. Moreover, the credit of DAO members is all on the chain, and it is difficult for traditional finance to access this credit system in a short period of time, and the flow of credit and the flow of value are separated. In the future development process of DID, it will gradually solve the identity problem of DAO members.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/did-improvements-to-on-chain-credit-operations-and-dao-identity/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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