Credit Score

On-chain scores are native financial primitives that can be integrated directly into smart contracts. This enables automated, conditional logic for:

• Risk-adjusted interest rates in lending pools
• Collateral-free credit lines based on score thresholds
• Custom underwriting rules for novel DeFi products Scores function as programmable inputs, allowing protocols to build dynamic, data-driven financial services without intermediaries.

The algorithms and data sources used to calculate scores are open-source and auditable. Unlike opaque traditional models, any user can verify:

• The specific on-chain data (e.g., repayment history, wallet age, diversification) being analyzed
• The mathematical weight assigned to each behavioral factor
• The final score calculation for any address This transparency builds trust and allows developers to understand exactly how financial reputation is quantified.

Scores are continuously recalculated based on live blockchain activity, reflecting a wallet's most recent financial behavior. Key dynamics include:

• Immediate impact of loan repayments or defaults
• Portfolio value and asset concentration changes
• Protocol interaction frequency and diversity This creates a living financial identity that updates with each transaction, providing a current risk assessment rather than a static, periodic report.

Any wallet address can generate a score without requiring an application, KYC, or prior relationship. The system is:

• Self-sovereign: The score is tied to the wallet, not a personal identity.
• Global: Accessible to any internet-connected user with a crypto wallet.
• Non-discriminatory: Based purely on observable on-chain actions, not demographic data. This opens credit assessment to the unbanked and underbanked populations globally.

Scores are derived from provable on-chain actions, not self-reported data or traditional credit history. Core analyzed behaviors include:

• Lending History: Timely repayment of loans on protocols like Aave or Compound.
• Wallet Longevity: Age and consistent activity of the address.
• Asset Management: Diversification, volatility, and yield-generating activity.
• Governance Participation: Voting and staking in DAOs. This creates a reputation based on verifiable financial actions.

Advanced models incorporate techniques to prevent Sybil attacks, where users create multiple wallets to game the system. Common methods include:

• Graph analysis of transaction networks to link related addresses
• Staking or asset-locking requirements to prove 'skin in the game'
• Integration with decentralized identity (DID) or soulbound token (SBT) protocols These mechanisms ensure the score reflects the genuine, consolidated reputation of a user, not easily fabricated identities.

Protocols use credit scores to issue loans requiring less than 100% collateral, a key innovation over traditional DeFi. A user's score, based on historical on-chain behavior, determines their credit limit and loan-to-value (LTV) ratio. This enables capital efficiency and mirrors real-world credit lines.

• Example: A user with a high score might borrow up to 50% of their collateral's value, whereas a standard DeFi loan requires 150%.
• Mechanism: Scores are often calculated using factors like wallet age, transaction volume, and repayment history on the protocol.

Some DAOs and protocols weight voting power or proposal rights based on a user's credit score, not just token holdings. This aligns influence with proven, long-term engagement and trustworthiness rather than mere capital.

• Purpose: Mitigates governance attacks from large, transient token holders ("whales").
• Implementation: A user's voting power might be a function of (token balance) * (credit score multiplier).
• Goal: Encourages responsible participation and long-term stewardship of the protocol.

Credit scores help distinguish real, organic users from Sybil attackers (users creating multiple fake identities) during token distributions or reward programs. A wallet with a meaningful transaction history and a high score is less likely to be a Sybil.

• Application: Filtering airdrop eligibility to reward genuine contributors.
• Metric: Scores analyze wallet interconnectedness, asset diversity, and sustained activity over time to detect artificial behavior.
• Benefit: Ensures fair distribution and protects the protocol's tokenomics from manipulation.

Lending protocols can segment liquidity pools based on borrower credit scores. Users with higher scores borrow from lower-risk pools with better interest rates, while those with lower scores access higher-risk, higher-cost pools. This creates a risk-tiered market.

• Analogy: Similar to credit rating tiers (AAA, BB) in traditional finance.
• Outcome: Lenders can choose their risk appetite, and risk is priced more accurately across the system.
• Result: Improves overall capital allocation and stability for the protocol.

An emerging concept where a user's credit score, built on one protocol or chain, can be verifiably presented to another. This requires standardized score schemas and verifiable credentials (e.g., using zero-knowledge proofs).

• Vision: A user's on-chain reputation becomes a portable asset, reducing the "cold start" problem on new platforms.
• Challenge: Requires interoperability standards and consensus on score calculation methodologies.
• Potential: Unlocks seamless, trust-minimized financial services across the DeFi ecosystem.

A persistent, verifiable identifier for a wallet or user, distinct from a credit score. It forms the foundation for building a reputation. Key aspects include:

• Decentralized Identifiers (DIDs): Self-owned identifiers not reliant on a central registry.
• Soulbound Tokens (SBTs): Non-transferable tokens that attest to credentials, affiliations, or achievements.
• Sybil Resistance: Techniques to prevent a single entity from creating multiple identities to game a system.

The practice of securing a loan or credit line with assets of value. It is the primary risk mitigation tool in DeFi lending, contrasting with undercollateralized lending enabled by credit scores.

• Overcollateralization: Common in protocols like MakerDAO, where loans require more collateral than their value (e.g., 150% Collateralization Ratio).
• Collateral Factor: The maximum percentage of an asset's value that can be borrowed against.
• Liquidation: The automated seizure and sale of collateral if its value falls below a required threshold.

The process of evaluating risk and determining the terms (amount, interest rate) of credit. In decentralized finance, this can be automated via smart contracts using on-chain data.

• Algorithmic Underwriting: Uses predefined rules and historical data (transaction volume, repayment history, asset diversity) to assess creditworthiness.
• Risk Parameters: Variables set by the protocol or underwriter, such as Loan-to-Value (LTV) ratios, interest rates, and credit limits.
• Continuous Assessment: Unlike traditional, one-time checks, blockchain underwriting can be a dynamic, real-time process.

A broader framework for quantifying trust and past behavior within a network. A credit score is a specific financial application of a reputation system.

• Multi-Dimensional Reputation: Can include governance participation, protocol contributions, or social attestations beyond pure financial history.
• Portable Reputation: A score or attestation that is not siloed within a single application but can be used across multiple protocols.
• Attestations: Verifiable statements from other entities (protocols, DAOs, users) that contribute to a reputation score.

A cryptographic method that allows one party to prove the validity of a statement without revealing the underlying data. This is crucial for privacy-preserving credit scoring.

• Selective Disclosure: A user can prove their credit score is above a threshold without revealing the exact number or their transaction history.
• Data Privacy: Enables the use of sensitive off-chain data (e.g., traditional credit history) in a score calculation without exposing it on-chain.
• Verifiable Credentials: ZKPs can be used to create cryptographically secure, privacy-focused proofs of creditworthiness.

The financial instruments created based on a credit assessment. A credit score facilitates access to these more capital-efficient products.

• Credit Delegation: In protocols like Aave, a user with collateral can delegate their borrowing power to another address, relying on the delegatee's creditworthiness.
• Revolving Credit: A pre-approved borrowing limit that can be used repeatedly, similar to a credit card, enabled by continuous credit monitoring.
• Flash Loans: Instantaneous, uncollateralized loans that must be borrowed and repaid in a single transaction block, representing a unique form of trustless credit.