Credit evaluation system accelerate the development of DeFi ecological ecology
The biggest difference between DeFi and Tradfi is that the financial infrastructure supporting the business is completely different.In reality, we have a whole set of credit risk assessment methods to measure business,but in DeFi, the blockchain is a trustless environment, and the address is essentially anonymous, which is different from the identity and reputation mechanism outside the blockchain.The credit risk assessment methods of mainstream finance are invalid, so the development of defi is highly “dependent” on blockchain technology.benefit by the application of smart contracts ,DeFi uses blockchain technology, based on tokenized assets, to achieve equal, efficient, highly transparent, and highly credible financial services.However, at the same time, the execution efficiency and delay of the system will expand the risk exposure, and even lead to stampede events such as chain automatic liquidation. The performance of the system is improved, and the introduction of a consensus risk control mechanism is urgent.
DeFi mainly involves the following types of risks:
1. Market risk refers to the risk of DeFi participants losing money due to adverse changes in the Token price. Because of the high volatility of cryptocurrency prices, market risks are very prominent in DeFi.
2. Credit risk refers to the possibility of loss by the creditor in DeFi due to the inability of the repayment address to fulfill the Token repayment obligation. Credit risk management in DeFi highly relies on over-collateralization, but over-collateralization cannot completely eliminate credit risk.
3. Liquidity risk refers to the inability of DeFi participants to obtain sufficient Tokens in a timely manner, or the inability to obtain sufficient Tokens in a timely manner at a reasonable cost to deal with the risk of asset growth or payment of due debt. An important source of liquidity risk in DeFi is that Token locks liquidity as collateral.
4. Technical risks mainly come from: 1. The physical performance of the blockchain prevents transactions such as on-chain auctions and on-chain collateral disposal from being processed in a timely manner; 2. Smart contract vulnerabilities and writing errors, which have been a problem since The DAO incident Important issues; 3. The oracle is inaccurate or is not updated in time due to the physical performance of the blockchain.When the market is turbulent and emotionally panic, the blockchain is prone to congestion. Some transactions that help clear market risks may not be processed by miners, or require higher handling fees or gas fees to be processed by miners. Ignored settlement risk. This will not only reduce the efficiency of market risk clearing and re-equilibrium, but also reduce market participants’ confidence in the orderly operation of the market and further amplify market panic.
From a macro perspective, we examine the stages of the development of the Internet relying on data, and divide the stages of data development into three stages: In the first stage, the data is disordered and has not been fully tested;
In the second stage, with the rise of big data and large-scale social networks, through the cross-checking and recommendation of big data, all data will be screened based on quality, and these data will no longer be disorderly, but can be sorted by certain artificial intelligence algorithms;
In the third stage, it is the blockchain that allows data to enter this stage, that is, some data will be achieved through the use of a global consensus blockchain mechanism, and these data can obtain a globally credible quality based on the Internet. It can almost be said that human beings are currently Obtain the data with the strongest credit foundation, and the accuracy and quality of these data have been improved unprecedentedly.
— -Melanie Swan
So, what role can Donut Protocol play in credit risk assessment? First of all, from a technical perspective, blockchain can help us establish our own data sovereignty and generate our own credit assets. This is the basis for personal credit production, as well as a means for our future important asset risk management and protection, and it is also conducive to infrastructure protection for the development of Defi finance.
DeFi activities occur in the blockchain and will be subject to the physical performance of the blockchain and the security of smart contracts. This also constitutes a major source of risk for DeFi. It should be noted that although the address in the blockchain cannot be used as a credit subject, the balance sheet of the address can be reorganized by analyzing the DeFi financial contract. Balance sheet analysis is an important DeFi analysis tool.
Interrelationships between DeFi projects
There are multi-dimensional interrelationships (Interconnenctedness) between DeFi projects, forming a complex risk transmission mechanism.
First, interconnected assets and liabilities.
Second, the interrelationship of information. For example, Uniswap acts as an oracle to provide price information to other DeFi projects.
If you regard DeFi projects as “points” and the multi-dimensional connections between DeFi projects as “lines”, then this provides another perspective for studying the topology of DeFi.
The interconnection between DeFi projects has pros and cons. The advantage is that developing DeFi projects according to functional modules can be assembled to get a DeFi ecology. This “point-to-surface” model will help the development of the DeF field.
There are multi-dimensional interconnections between DeFi projects, including interconnected assets and liabilities, as well as information interconnections.
We need to know clearly that the combination of P2P collaboration, credit confirmation, and smart contracts has a huge imagination, and the blockchain provides an unbreakable technical foundation and social consensus for this. Once the intelligent point-to-point interconnection network between people, between people and things, and between things is established, a closed loop of credit production can be formed.
Donut Protocol builds a more powerful engine in the credit risk assessment system
First of all, the disclosure of data on the chain.From the individual level,the blockchain can help us establish our own data sovereignty and generate our own credit assets. This is the basis for personal credit production, as well as our important asset source and guarantee in the future, as well as an important foundation for recommending Defi’s public infrastructure.
Different users have autonomy over their own data. After being authorized by the user, each user can track the transaction address on the account and pay the corresponding contract fee to get the past loan repayment record and the current general debt situation of the user.In addition, if there is a Defi loan project that wants to know the credit status of a user in the system, after the user is authorized, and after obtaining the approval of the relevant credit node and sending the corresponding token, you can link to the original database Way to check the user’s credit status.After that, you can try to include users in the “bookkeeper” to further improve the ecology, so as to continuously generate credit. This is also in line with the development logic of credit production. Relying on blockchain technology, “Defi Credit Risk Assessment” is worth trying. And Donut Protocol mentioned that they are currently building a Defi credit risk assessment system, and they are also moving in the direction of AML compliance.
In the exploration of the financial application field, DeFi is also restricted by the performance and security of the underlying infrastructure, and the basic technical capabilities still need to be consolidated. The “dual realization” of performance and security is also a problem that blockchain technology cannot circumvent.
As a result, the primary consideration for DeFi products should be basic technical capabilities, which is similar to the first consideration of liquidity and risk control in traditional finance.
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