Why Monetary Policy Needs On-Chain Identity and Reputation

Protocols waste billions in value on airdrops captured by bots and mercenary capital, diluting real users and failing to achieve network effects.\n- >50% of airdrop tokens often sold immediately\n- Zero long-term alignment with protocol health\n- High marketing spend for low user retention

On-chain reputation enables risk-based interest rates and credit lines without over-collateralization, unlocking capital efficiency.\n- Reputation as collateral reduces capital requirements by ~60-80%\n- Enables DeFi for the underbanked via verifiable transaction history\n- Creates sticky user loyalty through relationship-based finance

Anonymous, high-velocity capital floods protocols during yield farming, causing extreme TVL and token price volatility that destabilizes monetary policy.\n- TVL swings of >40% in days create governance chaos\n- Protocol parameters (e.g., emissions, fees) cannot adapt to real user needs\n- Long-term builders are penalized by short-term mercenaries

Weight voting power and reward distribution by proven contribution and tenure, aligning incentives with long-term protocol health.\n- Mitigates governance attacks from flash-loaned or sybil capital\n- Enables dynamic, targeted subsidies for high-value user actions\n- Builds a verifiable contributor graph (like EigenLayer, Gitcoin Passport)

Static inflation schedules, fee rates, and reserve requirements cannot differentiate between a loyal LP and a flash-loan bot, leading to inefficient resource allocation.\n- Real users subsidize extractors\n- Protocol revenue leaks to arbitrageurs\n- No ability to run counter-cyclical policy during stress

Smart contracts that adjust monetary policy in real-time based on user identity clusters and reputation scores.\n- Dynamic fee discounts for loyal users (see Gas Station Networks)\n- Tiered reward emissions based on contribution depth\n- Crisis tools like reputation-based withdrawal queues (inspired by MakerDAO emergency shutdown)

Protocols waste billions on Sybil attackers who extract value and dump tokens, destroying network effects and governance integrity.

• >40% of airdrop tokens often sold immediately by farmers.
• Governance attacks by low-commitment actors become trivial.
• Real user acquisition costs become unmeasurable.

Bind monetary distribution to provable, persistent identity and contribution graphs to align incentives with long-term health.

• Sybil-resistant airdrops using proof-of-personhood or stake.
• Vote delegation weighted by reputation scores from platforms like Ethereum Attestation Service.
• Dynamic reward curves that favor consistent participants.

Anonymous, uncollateralized lending is impossible. Over-collateralization locks up ~$50B+ in capital inefficiently, stifling credit markets and economic activity.

• Capital inefficiency cripples DeFi yield and scalability.
• No underwriting possible without identity and credit history.
• Systemic risk concentrated in a few volatile assets.

Use immutable transaction history to create sovereign credit scores, enabling undercollateralized loans and risk-based monetary policy.

• Programmable interest rates based on wallet reputation.
• Unlock trillions in latent credit capacity for SMEs and individuals.
• Protocol-owned risk models replace opaque credit agencies.

Token-weighted voting leads to plutocracy. Large, often anonymous, token holders dictate protocol changes, misaligning with user interests and innovation.

• Proposal turnout often <5%, dominated by a few wallets.
• Short-term profit motives override long-term sustainability.
• Voter apathy is rational when your vote doesn't count.

Decouple voting power from pure capital by incorporating verified identity and proven contribution. This creates a meritocratic, anti-plutocratic system.

• Quadratic funding & voting using BrightID or Proof of Humanity.
• Delegation to domain experts with skin-in-the-game reputations.
• Resilience against flash loan attacks on governance.

Blind airdrops and liquidity incentives are captured by bots and mercenary capital, with >30% of rewards often siphoned. This destroys policy efficacy and drains protocol treasuries.

• Key Benefit 1: Programmable, identity-gated distribution ensures capital reaches real users.
• Key Benefit 2: Drastically reduces inflationary waste, preserving protocol-owned value.

Over-collateralization (e.g., 150%+ in MakerDAO, Aave) is a capital sink. Reputation-based undercollateralized lending (see Goldfinch, Maple Finance) requires off-chain legal entities.

• Key Benefit 1: On-chain credit scores enable ~50% LTV ratios for trusted entities.
• Key Benefit 2: Unlocks trillions in dormant social/productive capital for DeFi.

Static emission schedules (see early Curve wars) are gameable and misaligned. Identity allows for reactive policies like velocity-based rewards or hardship grants.

• Key Benefit 1: Algorithmic adjustments based on on-chain activity history and participation.
• Key Benefit 2: Creates anti-fragile systems that strengthen during stress by supporting core contributors.

In anonymous systems, attackers have zero cost to re-enter. A persistent, non-transferable identity (e.g., BrightID, Gitcoin Passport) creates a sunk cost for malicious behavior.

• Key Benefit 1: Makes governance attacks and protocol exploits economically irrational.
• Key Benefit 2: Enables slashing of social capital, not just financial capital, for security.

Isolated reputation systems are useless. A portable, composable identity layer (the vision of Ethereum Attestation Service, ENS) allows policies to interact.

• Key Benefit 1: A user's good standing in Protocol A can lower their borrowing cost in Protocol B.
• Key Benefit 2: Creates network effects for good actors, accelerating ecosystem growth.

Full KYC kills decentralization. Systems like Semaphore, Aztec enable zero-knowledge proofs of group membership or reputation score without revealing identity.

• Key Benefit 1: Enables targeted policy (e.g., "US users only") without doxxing.
• Key Benefit 2: Preserves censorship resistance while adding policy granularity.