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Highlights
- Credit score holds immense value in traditional finance, but it is virtually absent in DeFi space
- DeFi passports add verifiable transaction history to any on-chain address and help the lender in vetting
- Solana has listed DeFi passport as one of the projects under its wide blockchain ecosystem
Decentralized finance is one category within the blockchain-powered universe that is gaining traction. It is all about linking two end users directly and weeding out intermediaries like banks.
In traditional finance, where fiat currencies like the US dollar dominate, intermediaries are inevitable. But these intermediaries – a bank acting as the facilitator of the transaction – increase costs and turnaround time. What makes DeFi a little risky despite all the cost benefits is lack of background check of any user. DeFi Passports claim to resolve this issue.
What are DeFi Passports?
You must have heard about know your customer (KYC) that is now an indispensable part of the global financial system. KYC enables proper verification and suitability of the user, and hence infuses credibility in the system. But in the world of DeFi, where on-chain addresses replace a human identity, KYC has yet to find any place.
What are DeFi Passports? Can they make DeFi lending more secure?
DeFi Passports come as the problem solver.
Also read: Explained: Cryptocurrency categories – DeFi, NFT, Metaverse
How do DeFi Passports function?
The passports verify users’ on-chain existence and reputation, thereby building a credit score for low-cost borrowing over DeFi platforms. In the absence of any background check, the DeFi ecosystem will be left with no choice but to treat all addresses identically. What DeFi passports do is they score all the addresses based on how long they have been holding tokens and if an address is using a bot to participate in trades.
Basically, such passports create a verifiable transaction history. This history contains data on participation in token governance, liquidity creation by the address, and even creation of digital assets including non-fungible tokens (NFT).
DeFi passport service providers, which include names like Solana (SOL), claim that passport holders can demonstrate their on-chain and off-chain reputation to lenders to fetch an under-collateralized crypto loan.
DeFi Passport service providers
Solana lists DeFi Passport as a service under its vast ecosystem that also allows smart contracts, building of DeFi platforms and minting of NFTs.
Solana (SOL) has been considered as the biggest Ethereum rival – yes, bigger than Cardano (ADA) – and SOL token’s rise in 2021 validates this claim. SOL is trading at over US$200 as of now, and commands a high market cap of over US$60 billion. For now, Ethereum doesn’t list DeFi passport services.
Another low-key player in this space is the ARC Governance token or ARCX. This project works solely in the DeFi passport space. It has a unique feature of providing colorful skins for passports, and the skins are listed on OpenSea NFT platform. Lately, ARCX scripted an eye-popping multi-fold gain, but this was due to a technical error in the CoinMarketCap data.
ARCX is trading at US$0.40 as of now, and it sits very low in the list of crypto tokens by market cap. If DeFi Passport and credit score allotment to on-chain addresses picks up pace in 2022, ARCX may find takers.
Also read: What led to ARCx’s 2,000,000% rise & fall? What's the price prediction?
Viewpoint
It is undeniable that the DeFi space has yet to become as credible as traditional finance. The latter enables background check of the borrower through KYC. The lack of transaction history of any user in DeFi can lead to unsuitable addresses and even bots accessing crypto loans. DeFi Passport regime aims to weed out this weakness by providing credit scores just like they exist in traditional finance. Solana and ARCX are two of the dedicated players in this field.
