Prominent investors back capital raising by Reputation DAO

Reputation DAO provides the conduit for this data to flow into smart contracts, providing greater security, rates and guarantees.

About $US200 billion ($270 billion) is locked in various DeFi borrowing and lending protocols. But growth of the market is limited by the requirement for over-collateralisation. (This means that to borrow from a protocol such as Aave or Compound, more than the amount sought needs to be pledged against the loan as collateral, typically another cryptocurrency).

This is necessary because DeFi lends to people whose identities are not known; indeed, loans can be taken out anonymously. There are no credit checks. The over-collateralisation means if the borrower defaults, the lender is paid back with interest from proceeds after the smart contract automatically sells collateral.

Reputation DAO will try to reduce the amount of collateral required, and ultimately push towards unsecured lending in DeFi.

It will do this by mapping off chain data such as that used for anti-money-laundering and know your client (KYC) compliance, traditional credit scores, open banking data, and social media feeds. This will improve account-specific risk metrics and deliver them into smart contracts.

Then youre going to be able to see instant algorithmic loans issued on blockchains through smart contracts, based off someones existing open banking history or credit data and combining that data with what already exists on chain, Mr McNab told the Summit last week.

Certainly, that is something that will evolve. Its a fundamentally new technology.

John Henderson, a partner at AirTree Ventures, said the absence of this sort of data on-chain meant DeFi lending markets are fighting traditional borrowing platforms with one hand tied behind their back as every loan must be over-collateralised.

Reputation DAO, he said, will help remove this barrier, unleashing the power of borrowing and lending via DeFi in the process.

Sergey Nazarov, the co-founder of Chainlink, has joined Reputation DAO as an adviser. Chainlink was created in 2017 to provide on-chain smart contracts with off-chain data, a service known as an oracle. It counts former Google CEO Eric Schmidt as a strategic adviser.

Mr Nazaroz, who some in the crypto scene suggest could be bitcoin inventor Satoshi Nakamoto (which Mr Nazaroz denies), said in a statement: DeFi is already redefining the global financial industry but one of the missing links hindering its growth is the lack of a comprehensive credit system. By enabling the secure transfer of real-world data to blockchains, Chainlink is helping Reputation DAO unlock the reputation infrastructure necessary to accelerate global DeFi adoption.

Mycelium has developed other decentralised protocols, including Tracer DAO, a platform for trading perpetual swaps. Mr McNab told the Summit Mycelium is educating regulators about how the systems operate.

Sid Powell, CEO of Maple Finance, an institutional lender in DeFi, told the Summit one of the major issues standing in the way of under-collateralised lending to the retail DeFi market was credit scoring and identification. Its development would allow retail lending protocols to reduce collateral requirements, which Maple has been able to do in the institutional context.

If youre lending to a corporate, the corporate will generally not have a problem providing identity and going through KYC, and then theyll provide financials, so you get a fairly good picture of their recurring ability to service interest and ultimately repay the loan, he said.

[But] at an individual level, you typically would have a lot of their financial activity actually occurring off chain. How do you pull in the information related to what their salary is?

In web2 underwriting, this would typically involve scrape of bank statements and looking at a FICO score if youre in the US, or calling a credit bureau. Borrowers arent conducting most financial activity on chain.

AirTree has been an early investor in several crypto start-ups and projects including Immutable, which is valued at $3.5 billion, Altered State Machine and Zeta Markets.