Why Reputation Dilution is the New Inflation

The cost of creating a pseudonymous identity is near-zero, while the rewards for gaming reputation systems are immense. This creates a permanent incentive misalignment.

• Sybil-for-hire services offer ~$0.10 per identity with full automation.
• Airdrop farming and governance attacks exploit this, diluting the value of legitimate user signals.
• Legacy systems like Proof-of-Humanity struggle with scalability and cost, failing to keep pace.

Reputation is siloed across thousands of dApps, chains, and social graphs. A user's credibility on Aave doesn't transfer to Uniswap or Farcaster.

• This forces users to rebuild reputation from scratch, a massive UX and security friction.
• Protocols cannot compose trust, leading to redundant KYC and lower capital efficiency.
• The lack of a portable, composable reputation layer is the missing primitive for the on-chain economy.

Current systems measure volume, not value. A whale's $10M wash trade and a builder's 100 meaningful contributions are often weighted the same.

• Raw transaction count and TVL are gamed easily, creating misleading signals for credit, governance, and access.
• We lack robust frameworks to quantify consistency, longevity, and positive-sum behavior.
• This gap allows reputation inflation to run rampant, as activity is cheap but quality is expensive to verify.

The antidote is a decentralized, composable framework for issuing and verifying claims. Think Ethereum Attestation Service (EAS) or Verax as foundational layers.

• Enables portable, granular reputation that travels with the user's wallet.
• Allows protocols to build upon a shared truth layer, reducing redundant verification costs.
• Shifts the game from Sybil creation to Sybil detection via a web of trusted attestations.

Reputation must decay with inactivity and be specific to domains. A great DeFi trader isn't necessarily a qualified DAO voter.

• Time-decay functions prevent historical reputation from being permanently monetized.
• Context-specific graphs ensure a governance reputation on Optimism is distinct from a lending reputation on Compound.
• This creates dynamic, defensible scores that are far harder to inflate artificially.

Move beyond Proof-of-Stake and Proof-of-Work to consensus based on verifiable, valuable participation. Projects like Gitcoin Passport and Noox are early experiments.

• Rewards users for positive-sum actions like bug bounties, quality governance votes, and educational content.
• Aligns reputation generation with network health, making inflation beneficial to the system.
• Turns reputation from a cheap commodity into a capital asset that requires sustained, constructive effort to accrue.

Permissionless identity creation enables infinite minting of low-value reputational units, collapsing signal-to-noise ratios.

• Cost of Attack: Sybil creation is often < $1 per identity.
• Network Effect: Value depends on scarcity; infinite supply from Gitcoin Passport or Worldcoin-like systems creates hyperinflation.
• Consequence: Reputation becomes a worthless commodity, not a capital asset.

Off-chain reputation scores (e.g., credit, social) are gated by centralized oracles like Chainlink, creating a single point of failure and rent-seeking.

• Data Integrity: Oracles can censor, manipulate, or provide stale data.
• Economic Capture: Oracle operators extract >30% margins as rent for essential data feeds.
• Systemic Risk: A corrupted Ethereum Attestation Service feed can poison every downstream reputation protocol.

In DeFi, MakerDAO's collateralized debt positions have clear liquidation math. Reputation-based lending (e.g., ARCx, Spectral) suffers from unquantifiable and non-fungible risk.

• Valuation Gap: Reputation score of 750 is not a $750 asset; its market value is undefined.
• Default Risk: Cannot be liquidated or seized, breaking the core DeFi risk model.
• Result: These systems either remain niche or blow up during their first stress test.

Protocols like Optimism's Citizen House or ENS's delegate system use reputation for voting power, inviting perpetual dilution from new entrants.

• Vote Dilution: Each new cohort of "citizens" reduces the influence of early, high-signal participants.
• Incentive Misalignment: New users vote for inflationary grants (e.g., Uniswap's "fee switch") to extract value, not preserve protocol health.
• Outcome: Governance converges to $0 value as reputational voting power is infinitely minted.

Zero-knowledge proofs for reputation, as explored by Sismo and Semaphore, solve sybil-resistance but destroy composability and liquidity.

• Data Silos: A ZK proof of "Gitcoin Passport holder" is a non-transferable, non-composable black box.
• Liquidity Fragmentation: Cannot build a unified reputation market; each app has its own sealed system.
• Trade-off: You choose between privacy and liquidity. Most financial systems choose liquidity.

Reputation farming for anticipated airdrops (e.g., LayerZero, zkSync) creates a reflexive bubble that pops post-distribution.

• Temporary Alignment: Users perform high-cost actions expecting $10k+ rewards, not to use the protocol.
• Post-Drop Collapse: >90% of sybil farmers exit immediately, leaving the reputation graph barren.
• Legacy Cost: Protocols inherit a corrupted historical dataset, poisoning all future reputation algorithms.

Spinning up infinite pseudonymous identities is the equivalent of printing money, devaluing on-chain reputation and trust. This breaks governance, airdrop mechanics, and social graphs.

• Consequence: >90% of governance votes can be gamed by airdrop farmers.
• Solution: Move from token-weighted to proof-of-personhood or attestation-based systems (e.g., Worldcoin, Ethereum Attestation Service).

A wallet's history of good behavior (timely repayments, quality curation) is a unique asset. Treating it as fungible via simple token delegation dilutes its signal.

• Consequence: Lending protocols blindly accept delegated tokens from unknown stakers, increasing systemic risk.
• Solution: Build with soulbound tokens or non-transferable reputation graphs that accrue to persistent identities.

The infrastructure for portable, sybil-resistant reputation is the next zero-to-one opportunity. It's the base layer for the next generation of DeFi, social, and governance.

• Market Gap: No standardized reputation oracle exists, unlike price oracles (Chainlink).
• Investment Thesis: Back protocols like CyberConnect, Gitcoin Passport, and EAS that create and attest to reputation data.

In a world of forked code, a loyal community with skin-in-the-game reputation is the only defensible barrier. This applies to DeFi, SocialFi, and on-chain gaming.

• Action: Design progressive decentralization where early users earn non-transferable reputation scores.
• Example: Friend.tech keys are a primitive proxy for social reputation, though currently transferable and speculative.

We have oracles for asset prices, but not for trust. Reputation must be computed from verifiable, on-chain actions, not off-chain promises.

• Technical Challenge: Aggregating signals from DeFi activity, governance participation, and social contribution into a single score.
• Emerging Stack: Look to Karma3Lab, Orange Protocol, and RNS for scoring frameworks.

If every app builds its own siloed reputation system, the network effect fails. Reputation must be a portable, composable primitive to have systemic value.

• Current State: Fragmented scores across lending, social, and DAOs that don't interoperate.
• Future State: A universal reputation layer where a good standing in Compound improves your terms in a new DeFi protocol on day one.