Biometric-based Credit Scoring

What is a Credit Score?

Credit score is a range of numbers that represents a consumer's creditworthiness. The higher the score, the more appealing a borrower appears to potential lenders. A credit score is determined by credit history, which includes the number of open accounts, total amounts of debt, repayment history, and other criteria. Lenders use credit ratings to assess the likelihood that a borrower will repay loans on time.

A credit score can have a huge impact on your financial life. It is an important factor in a lender's decision to extend credit to you. People with low credit ratings are considered subprime borrowers. Lending institutions frequently charge higher interest rates on subprime mortgages than on regular mortgages to compensate for carrying additional risk. For borrowers with a low credit score, they may also request a shorter payback term or a co-signer. A high credit score is generally considered good and may result in a borrower having a reduced interest rate, resulting in them paying less money in interest over the life of the loan.

Credit score is one statistic that can cost or save you a lot of money over the course of your life. With a great credit score, you can get reduced interest rates, which means you will pay less for every line of credit you take up. However, it is up to you, the borrower, to ensure that your credit remains solid so that you may access more borrowing possibilities if necessary.

Who uses Credit Score?

Banks are not the only ones who use credit scoring. The same approaches are used by cell phone companies, insurance companies, landlords, and government institutions. Alternative data sources are being used by digital finance organizations, such as online lenders, to determine borrowers' creditworthiness.

A credit history is a record of a borrower's timely debt repayment. A credit report is a record of a borrower's credit history obtained from a variety of sources, such as banks, credit card companies, collection agencies, and governments. A borrower's credit score is the output of a mathematical algorithm that uses information from a credit report and other sources to forecast future delinquency.

Credit risk is the possibility of a debt default as a result of a borrower's failure to make required payments. The lender bears the risk in the first instance, which includes lost principle and interest, cash flow disruption, and increased collection costs. The loss could be total or partial. Higher levels of credit risk will be associated with higher borrowing rates in an efficient market. As a result, borrowing cost metrics like yield spreads can be used to infer credit risk levels based on market participants' opinions.

When a customer applies for credit from a bank, credit card firm, or store in many countries, their information is transmitted to a credit bureau. The credit bureau compares the credit applicant's name, address, and other identifying information to information stored in the agency's files. Lenders utilise the acquired records to establish an individual's credit worthiness, or an individual's ability and track record of repaying a debt. The willingness to repay a debt is evidenced by how timely past payments to other lenders have been made. Lenders want to see consumer debt obligations paid on time and on schedule, thus they place a premium on missed payments and may not consider an overpayment as an offset for a missed payment.

Loans can be made in finance by taking into account a variety of elements such as payment history, amounts owed and loan length. In the case of DeFi, this is data that is already available in the open ledger.

Decentralized Credit Scoring

The applications for pseudonymous, decentralised profiling and assessment of identities based on on-chain activities are unlimited within blockchain. There are  already projects such as ARCx with plans to roll out “Yield Farming Scores” that evaluates whether a farmer has a long-term mindset, which shows support for a protocol's long term growth---as opposed to farming and immediately selling. “Airdrop Score,” which determines whether an address on-chain holds airdrops or sells their tokens quickly, demonstrating support for a protocol's long-term growth. Besides that, a “Governance Score” metric that tells protocols and builders how involved a user is in on-chain governance. Beyond governance metrics, the types of decisions a user makes on-chain and the nature of their governance in a specific protocol(s) can reveal a lot about their motivations and future behaviour.

What does it mean to be a good borrower in DeFi? A good borrower may have had a loan on Compound/Maker/Aave for more than 6 months, never been liquidated, and maintains a large collateral position while maintaining a high (time-averaged) collateral ratio.

How Humanode solves challenges in credit scoring

While the credit reporting system is intended to safeguard both lenders and borrowers, there are vulnerabilities that can be used by malicious actors. Churning, rapidfire credit applications, repetitive credit checks, selective credit freezes, applications for small business credit rather than personal credit, piggybacking, and hacking, as happened with Equifax in April and September 2017, are just a few of the motivations and techniques for credit abuse.

Humanode uses pseudonymous biometric identifications that can be audited. In a nutshell, the technology connects a user's identification to their biometric data. The solution employs crypto-biometrics, which are designed to keep the user's biometric identification completely private while establishing that the individual is truly alive and validating that the person who is attempting to log in is the same person who is attached to the account.

DeFi Protocols will be able to provide sybil protections with user accounts coupled to crypto-biometrics-based identity, allowing only “proven human beings” to construct (or use) credit ratings for native crypto applications.

Humanode biometric identifications are likely to be integrated into lending platforms as a user identification option, either as a browser extension or as a full-fledged app. They will offer the most user-friendly interface and a straightforward approach to interact with blockchain-based services. Furthermore, creditors and debtors will be able to remain pseudonymous while using blockchain-based applications by demonstrating they are real human beings rather than revealing their identities. They'll be able to borrow and lend with ease, as well as sign transactions in the most accurate and secure manner possible. This would be a fantastic method to build a reliable reputation system.

Humanode API

1. Humanode Network API  integration with web3 wallets and extensions
2. Users validate liveness detection with their phone or laptop camera during registration
3. Single sign-on (SSO) for Humanode powered dapps and protocols
4. Biometrics data will always be encrypted, to preserve privacy.

Conclusion

The crucial point is that biometrics are unique, especially when combined with crypto-biometrics, which provide the highest level of identity verification for credit score. It is a win-win situation for both the creditor and the debtor, while also resolving a major issue for lending platforms in terms of establishing trust and responsibility.