DeFi Needs Reliable Credit Scoring System, but We Must Be Cautious

This article was first published on OntologyNetwork - Medium
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A byline by our Founder, Li Jun

Originally published in BeinCrypto.

Credit scores have been a cornerstone of risk evaluation in the global banking systems for decades.

They allow banks to determine who qualifies for a loan, at what interest rate, and what credit limits. Lenders use these scores to evaluate the likelihood that the borrower will fulfill their obligations and repay their loan.

The global lending and payments market reached $6.7 trillion in 2020. It will possibly reach $7.6 trillion in 2021.

If you’ve ever applied for a bank loan, you’ll know that these traditional credit scoring systems and in-depth identity verification processes work together. These include proof of address and a copy of a passport or official identification.

Now, Europe’s Open Banking initiative, PSD2, is set to bring credit scoring into the 21st century. It will make it possible for lenders and borrowers to access a full picture of an individual’s financial history in real-time.

Its introduction into financial services systems will revolutionize the loan process. It will increase speed, accuracy, and more importantly, financial inclusion.

DeFi lending still in its early stages

In comparison to this highly sophisticated system, lending and borrowing in the DeFi industry is still in its nascency.

However, as we know, over the past 12 months it’s grown at an incredible rate. Total Value Locked (TVL) in DeFi as of March 2021 stands at $39.7 billion, according to DeFi Pulse.

What’s more, it is lending that makes up for the largest segment of that market. The DeFi lending market sits at $17.8 billion....

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OntologyNetwork - Medium

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