What are Credit Scores and Why are they Significant in the DeFi Space?
From top-tier financial institutions to SMEs, all are dependent on what is now known as the credit score. The traditional decision-making role of the lending officer from back in the day transformed into FICO score, which took into its consideration various factors and behaviors associated with credit risk and approached it statistically. Thereby, making credit scores a mainstay of traditional lending systems.
On that note, while DeFi lending platforms are revolutionizing the traditional financial landscape, organizations like Hybrid Bank are taking a necessary step backward to allow the distance to bring together the best of both decentralized and traditional lending. Thereby making a crucial leap necessary to the evolution of DeFi — bringing credit score protocol to blockchain.
The Importance of Credit Scores
While this incorporation ushers in the value of credit scores to DeFi, the DeFi space itself adds associative significance to credit scores.
Credit score essentially reflects credit risk, that is, the possibility of the lender incurring a loss from the borrower’s failure to pay the borrowed amount back. Collaterals and interest rates are therefore mitigation strategies. Credit scores play a key role by presenting your creditworthiness to the financial world and making it easier for you to secure a loan.
For example, a good credit score (640–850) results in lower interest rates and higher credit limits. Individuals with low credit score, that is, below 640, are categorized as subprime borrowers, and they incur high interest rates as a compensation for the added risk.
Sharing Credit Score
Coming back to the fundamental differences between traditional and DeFi credit scores, traditional credit scoring bureaus essentially sell user data to anyone who pays for it. One of the more decisive drawbacks of traditional credit score is its inability to be of value beyond border.
As an example, although the credit bureau Equifax is located in 24 countries across the world, the credit scores of an individual in the USA has no bearing overseas. Therefore, making it difficult to establish creditworthiness on foreign soil.
DeFi brings the power of ownership and control back to the individual by limiting access to third parties. With Hybrid Bank’s credit rating system, the user can choose to share credit scores with anyone of their choice, located anywhere in the world. Hybrid Bank also issues a percentage of the money earned from sharing the data as remittance to the user.
Ownership of Credit Scores
Ownership of data by traditional credit bureaus have also led to identity thefts, data leaks and infamous breaches. Within blockchain’s secure and robust system, Hybrid Bank’s credit ratings are verified and updated automatically with prompts for actionable insights from time-to-time. It allows users to monitor their own credit scores and share only as much information as they want to with a third party, thus guaranteeing informed decisions and privacy.
Apart from payment history, length of history, new credits and types of credit, DeFi-based credit reports also take into account important details like watchlist data, social media, assets, identity documents, and income for increased risk mitigation.
Hybrid Bank’s credit information system is the first of its kind that allows end-to-end flow of real-time credit score for cryptocurrency. Thus, making that necessary evolutionary jump on behalf of the DeFi ecosystem.