A decentralized credit rating platform will constitute a necessary condition for institutions to enter the Defi market
Where is the core bottleneck in the development of DeFi?
The first half of DeFi, “Decentralized”, means that it is open, without censorship, and anyone can participate. In the second half, the part about “Finance” was not highlighted.
At the blockchain level: There are a variety of unresolved problems. Among them, potential crimes can cause industry risks because they do not need access permissions. It is difficult to locate the real users behind the account.If the borrowed digital assets are used for illegal purposes, who is responsible? For example, financial institutions will do the AML process in order to prevent the connection with criminal acts. Failure to do a good job of AML will touch the supervision. After the prosperity of DeFi in the future, the value of digital assets will reflect, and it is necessary to find the responsible party to be used for criminal reverse behavior.
And financial intermediaries generally perform three functions: payment, credit, and matching. These three functions are actually completely affordable by the blockchain. Bitcoin itself is a payment system, although it is ultimately biased towards value storage. The digital currencies born after Bitcoin can be used for payment. Projects such as Ripple and Stellar use pure payment tools to cut into business.
In terms of credit, the blockchain is de-creditable. The role of financial intermediaries gives way to cryptographic algorithms. The blockchain architecture can ensure that the data on the chain cannot be tampered with. The credit endorsed by large institutions is replaced by consensus, which is a new kind of Credit form.
At the level of matching mechanism, decentralized exchanges have just started, and transactions can be completed directly on the chain, indicating that matching on the blockchain is feasible. Of course, larger scenarios still need to rely on off-chain, especially scenarios involving the exchange of digital assets and other assets (such as legal currency).
DeFi’s core financial functions require clear usage scenarios
For the three basic functions of finance, DeFi is structurally satisfactory, while the core of the financial industry is risk management. In fact, it has not entered the scope of decentralized finance currently discussed. The risk here generally refers to maturity mismatch, credit risk, liquidity risk, market risk, operational risk, etc.
As information exchanges become more and more rapid and full, the role of solving information asymmetry has gradually declined, but it has also caused an excessive increase in information and data. Analyzing information, solving information, and giving operational suggestions have become new demands in the financial industry. And these are not only about the blockchain, but also a combination of data and trust. Blockchain can play the characteristics of no access and trustlessness, and the combination of data is more important.
At present, the structure of decentralized finance is not yet complete. The main reason is that the requirements for risk management are still unclear and the tools are not yet complete. Lending financial forms need to clearly identify the pain points of users, and decentralized transactions have not lacked liquidity and price compensation mechanisms.
Therefore, the current blockchain-based DeFi architecture can perform certain payment, credit, and matching functions, but for core risk management, clear application scenarios are still needed.
Decentralized credit rating agency
In terms of lending, everyone currently adopts an over-collateralization model, which is equivalent to treating all borrowers equally. But in fact, the credit rating between institutions and individuals is completely different, so the same costs should not be paid. For example, in the current popular 150% over-collateralization model, the excess part has an opportunity cost. How to reduce this cost requires a rating agency.
Donut Protocol will be used as one of the important credentials for credit and risk assessment to reduce the amount of over-collateralized loans, increase the user’s asset utilization rate, and provide opportunities for emerging DeFi solutions
Credit risk analysis refers to the qualitative analysis and quantitative calculation of factors that may cause loan risks to measure the borrower’s default probability and provide a basis for loan decision-making, such as whether to issue or not, price determination, issuing conditions and forms, etc., and through intuitive The scoring system gives instructions. Obviously, credit analysis is an important tool and key evidence for credit risk management.
After the emergence of distributed commerce in the future, the borrowing of tokens will inevitably give rise to demand, and the rating to help institutions reduce costs will also become a demand.
Moreover, decentralized ratings are also easier to gain market trust. In the past, the business model of centralized rating agencies was considered to have conflicts of interest. If decentralized rating agencies directly adopt the data + community rating method, the degree of credit may be higher. However, it is also more difficult, because it is difficult to locate online identity and real identity together. A person can also have many accounts at the same time, so the negative penalty mechanism may be difficult to use.
The infrastructure listed above is mostly centralized. We believe that although the market is decentralized, trust still has to start with centralization, especially when it comes to financial services. The traditional credit model is still applicable, so it is easier to produce results. Decentralized infrastructure is more of an exploratory behavior and more like the venture capital industry.
Looking to the future: DeFi will become an important part of open finance
Fintech is widely affecting the financial market. The revolution in the financial technology 1.0 market scenario is Internet finance. It is the scope of traditional financial institutions that move application scenarios from offline to online and build Fintech 1.0 through scenarios that occur on the Internet.
Fintech 2.0 represented by Open Banking is underway. The European Open Banking policy is that banks change the product-centric tradition and face customer-centricity. Through the open banking API, banks pass their own payment, data, risk management, and pricing. Yes, general financial institutions can also use banking APIs to apply to their own business scenarios. This is a financial technology 2.0 scenario dominated by bank reforms.
What is about to happen is FinTech 3.0, a reconstruction of financial infrastructure.
At present, a group of large companies with real business scenarios are beginning to use blockchain to build applications, such as Facebook’s C-side model Libra, JPMorgan’s B-side model JPM Coin and so on. Will these applications be able to interface with DeFi in the future or will they become part of DeFi? This makes the application scenarios of the public chain based on blockchain 3.0 more inclusive. With these elements, DeFi can become a real prosperity in the future.
The above content is taken from hashkey https://hub.hashkey.com/
contact: donutprotocol@gmail.com
