The latest craze to hit the Crypto space is Decentralized Finance, or DeFi for short. Backed by the notion that a decentralized architecture is capable of recreating traditional finance in an environment without any centralized middlemen, DeFi is growing into an ecosystem of financial applications that are universally accessible to all.
These blockchain-based financial applications are however facing fierce competition. That might not be so obvious to many at the moment, but if you follow the trends in the broader financial technology (Fintech) space closely, you might have noticed this.
Where is the competition coming from?
The competition is coming from AI and centralized digital finance applications and platforms driven by Big Data. In the new era of modern finance, digital lending is an emerging trend that influences expectations and fuels new demand for lenders.
What makes a centralized digital lending platform so popular is that, unlike commercial banks and traditional microfinance, it is its fast-paced and widespread consumer acceptance. Today, it can take mere seconds to minutes to apply and get a loan approved, with some lenders not requiring the borrower to provide collateral upfront.
Unbeknownst to its users, AI technology is actively being used to collect data for analyzing, whilst advanced algorithms that make it easy to digest the mass of user data. This makes it easy to determine what amount the borrower is capable of repaying and indeed, whether they are willing to pay. These centralized lending platforms also collect data about their contacts. They effectively use data as the collateral and a fee for the risk involved.
Where DeFi is at a Disadvantage
Meanwhile, to take a loan from a DeFi, you must deposit collateral that is more than what you want to borrow. On Compound Finance for example, you can only borrow about 70% percent worth of your collateral. This limits the number of individuals who are entitled to borrow and only those accessible collateral are deemed credit worthy. Furthermore, the requirement to overcollateralize loans make them highly unattractive, even for users who are able to bring up the necessary collateral.
Overall, this limits the ability of DeFi to compete with centralized digital finance platforms. For DeFi applications to effectively compete with centralized finance, they have to, like their competitors, leverage data and sophisticated AI algorithms. However, unlike the centralized digital lending platforms, DeFi applications cannot plant code in users' phones to collect data to determine their creditworthiness.
At this point, cryptocurrencies are typically pseudonymous, with only the details surrounding transactions being recorded publicly visible on the blockchain. This makes it hard to find sufficient data to estimate a reliable credit score. Moreover, users can always evade a bad credit rating by simply creating a new wallet address.
Having stated that, DeFi applications have the opportunity to use any public on-chain data as much as the centralized digital platforms do, including using AI algorithms to glean information for making critical decisions that would allow them to better serve their customers. However, the usefulness of transaction data is limited and unreliable due to their open and pseudonymous nature.
How the Shyft Network could fix DeFi
This is precisely where Shyft Network comes into play, by providing an identity layer for decentralized applications (dApps) that are powered by blockchain technology.
The reason why DeFi lending platforms require collateral that is 50% higher than the amount to be borrowed is that you don't know who you are transacting with on those platforms. You can't know their real-world identity, let alone their history. All it takes for one to shake off a financial responsibility if they did not have collateral locked in a smart contract is to drop an address on the blockchain and quickly create another one for a fresh start. The only way to be assured of repayment on the platform is overcollaterization.
Shyft Network is a blockchain platform that is designed to solve this problem without jeopardizing the privacy of the user. The user knowingly discloses their details and, even after that, retains full control of the data. The platform offers a secure channel for this purpose.
An important aspect of this is that independent third parties (known as Trust anchors or Attestors) safeguard the credibility of the data. They collect the data, authenticate, and store it off-chain until it is needed. The owner of the data must provide authorization using digital signatures in order to grant third parties permission to interact with their personal user data. The blockchain, through encryption and smart contract capabilities, makes this type of secure identity verification possible.
With state-of-the art security, personally identifiable data is protected and recorded off-chain, while hashed zero-knowledge proofs are stored on the blockchain. The former makes it impossible to access the data without permission, and the latter makes it immutable so that its details cannot be changed arbitrarily.
Borrowers and lenders on DeFi can provide critical information about their users and that can help with decision making. DeFi services and applications can know not only the real-world identity of the loan applicant, but also their credit history and other data that might be used in order to infer a credit rating. This can create an environment of understanding and encourage personalized offers, giving creditworthy borrowers better interest rates and potentially dropping the requirement for collateral.
Shyft Network stands to serve as a secure, stable, and dependable bridge between DeFi platforms and the real world. It could also be a step towards a global digital credit bureau on the blockchain that can protect good actors from bad actors. People can build a reputation over time, which can become a valuable asset in the federation of blockchains.
Meanwhile, the ability of DeFi to access data from the real-world gives them the capacity to effectively compete with centralized digital lending platforms in terms of user experience and functionality. More importantly, they can fully utilize their strengths, treating users with a lot more respect by not collecting their data without permission and giving them full control of their personal data.
Shyft Network has partnered with several other blockchain platforms to facilitate the onboarding of their users’ real-world identities. They can then carry this identity to whatever other platforms they visit, which can ease interactions and bring even open more opportunities for innovation. Some of the platforms that Shyft Network has partnered with include Algorand, Chainlink, and BurstIQ.