Blockchain has emerged as a significant technological development in the past decade, becoming one of today’s top tech trends. Despite widespread awareness of blockchain, there remains a lack of clear understanding regarding its nature and functionality.
Essentially, blockchain is a technology that enables secure and reliable information sharing. Unlike traditional databases, which store data in a centralised manner, blockchain employs a shared database concept. It stores data in blocks linked together using cryptography. Accessing or adding data to the database requires two cryptographic keys: a public key (address) and a private key authenticated by the network.
The use of blockchain has experienced explosive growth since the introduction of Bitcoin in 2009, particularly with the rise of various cryptocurrencies, smart contracts, and Decentralised Finance applications (DeFi).
Blockchain possesses the potential to revolutionise industries from the ground up, earning its reputation as a game changer. The rating industry has also witnessed this transformative power, considering the significant changes brought about in the financial sector by blockchain.
DeFi has opened up new possibilities for peer-to-peer (P2P) financial services, eliminating the need for intermediaries or central authorities. Decentralized credit scoring involves assessing a borrower’s creditworthiness using on-chain or off-chain data. This assessment takes place on a blockchain managed by a P2P network of computers, devoid of any central authority or control point.
In 2020, blockchain lending protocol Teller secured $1 million in seed funding, led by Framework Ventures, to integrate traditional credit scores into DeFi. The Credit DeFi Alliance (CreDA) in November 2021, launched a credit rating service that evaluates a user’s creditworthiness using data from multiple blockchains.
CreDA utilizes the CreDA Oracle, which evaluates the user’s past transaction records across various blockchains with the assistance of AI. Analysed data is then transformed into a Nonfungible Token (NFT) known as a credit NFT (cNFT). This cNFT serves as a basis for determining incentives or interest rates specific to the user when borrowing from a DeFi protocol.
Blockchain in the rating industry can overcome challenges faced by traditional credit agencies by incorporating diverse data sources like transactions, identities, social media, and IoT for more accurate credit assessment..
The accurate assessment of a borrower’s creditworthiness holds immense importance. The blockchain industry, through DeFi, has brought security and efficiency to the financial sector, making it an even more effective assessment tool for the future.