Let’s take as a comparison a centralized lending platform, and it’s decentralized counterpart
I invest in everything. I hold stocks, bonds, mutual funds, and cryptocurrency. I copy trade. I hold microloans, real estate, cryptocurrency miners, cash, fiat currency, gold, silver, you name it, I hold it. The variety of my holdings goes beyond diversification. I’m interested in testing every form of investment, if nothing more than for pure curiosity of the financial instrument. It’s one thing to read a book about the subject, it’s entirely different to have some skin in the game. It’s often that you don’t get a full picture of where you want you finances until you’ve tested the waters in a concrete way.
In a sense, many of these holdings are different forms of lending. In the case of cryptocurrency you’re often supplying value to a decentralized ecosystem in exchange for some kind of utility, or return, in the case of proof of stake. In the case of bonds, you’re supplying capital to an entity at some agreed upon interest rate. However, in all my dealings with traditional financial instruments, there is one thing that separates them from blockchain based financial instruments: their opacity.
Prosper
As previously stated, I hold microloans on the prosper platform. I initially invested because it seemed to me a novel idea. I remember when I was younger googling “how to start your own bank”. I graduated high school during the 2008 financial crisis, and it seemed to me, the banks had it made. They give you money, do nothing, and profit. If you don’t pay them back, they take your collateral. Nearly no risk, and a guaranteed return. Obviously things aren’t that simple, but this desire to be a moneylender stayed with me. This desire led to me invest some bitcoin profits into prosper microloans.
The prosper system offers a number of metrics to a would be lender. Among these are the borrowers state, their FICO score range, their income, and their Debt/Income ratio. Another metric is the proprietary “Prosper rating”.
You’d think that all of these metrics would make it easy to choose a borrower that won’t default, and yields a nice return. However, the world is a complex place, and even the most risk averse borrower can have their spell of bad luck.
ETHLend
With prosper all I get are these metrics, which granted, are great metrics. However, I have nothing but these metrics. No past purchases, and certainly no detailed tracking with regard to how the money I’ve let is being spent. Once the money is lent, it’s a black box that either returns, or doesn’t return interest.
And therein lies the difference between the two platforms. With ETHLend, I don’t need third parties to background check borrowers. I don’t need to rely on a “proprietary rating” to inform my decision on whether to lend or not. And even if I did decide to defer to a blockchain based rating, the rating will be fully open and audit-able. I can follow every step of the process, in much the same way we can audit the bitcoin code, yet have no idea how our Facebook feed is generated for us. I can trace every transaction made up to the point of requesting a loan from me, and if anything unsavoury surfaces, or a transaction is made that I’m uncomfortable with, I can refuse the loan. In the case of a centralized lending service, I have no idea who the borrower is, how they spent their money in the past, or how they’re spending the money I’ve lent to them currently. Sure, the metrics afford me an broad overview, but with the blockchain I can drill down into every minute detail of an address’s history at my discretion.
Let’s say I lend to an IoT vending machine which uses my currency to order goods to sell, and with it’s profits pays my interest, all via ETHLend. Currently a credit score on the blockchain doesn’t exist, so let’s assume I know nothing about this vending machine. Let’s say this device is vending to addresses I’m not comfortable with, or receiving goods from addresses I’m uncomfortable with. I can immediately blacklist this device as soon as these transactions appear on the blockchain. And, thanks to the blockchain, if the device has made any transaction in the past that I’m not comfortable with, prior to requesting a loan, I don’t even need to go through the hassle of loaning to it first, and blacklisting it afterwards, I can blacklist it as soon as this unsavoury transaction is made.
The implications for this are obvious. Since all transactions are open and auditable, every address can have assigned to it a credit score, almost trivially. In the next post, we’ll discuss the details of what this credit score might look like. We’ll also take a look at how ETHLend handles collateral, and how the ENS domain names function in this context. Until then!
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