Background

Control and Privacy of Personal Data

Individuals cannot securely control and monetize personal data because of ongoing network hacks, leading to fraud and reporting errors. Large organizations collect and harvest data making them targets for hackers. Additionally, because each organization stores the data they collect, their decisions are based on fragmented and incomplete data, leading to mistakes and compounding losses. In a typical day, we produce 2.5 quintillion bytes of data. There are multiple data quality issues in the current data collection landscape, such as incomplete data, unverified data, inaccurate data, and niche-only data. With this framework, much of the data is sourced from a complex network of first, second, and third-party data sources. 

1. Fraud up 38% in 2020, FTC
2. Security Issues w/ Holding BigData, 
3. Value of BigData, Harvard Business Review*
4. Fraud up 38% in 2020, FTC
5. Security Issues w/ Holding BigData, 
6. Value of BigData, Harvard Business Review*

Fair and Inclusive Scoring System

The FTC estimates that around 25% of all US credit reports contain at least one error negatively affecting consumers’ credit scores. These issues w/ our current credit reporting, verifying, and scoring protocols have stemmed back to the 1700s. One of the original purposes of a ledger was recording critical financial data and assessing individuals’ credibility using the ledger as a reference. Then bureaus began to form, collecting information allowing organizations to understand consumers’ financial position. These organizations eventually began having significant problems stemming from heated issues regarding sexism, racism, and invasion of personal privacy. This led to the creation of the credit scoring system known as FICO. In 2015 the US declared credit scoring a monopoly controlled by a single organization, FICO, providing credit scoring for more than 90% of the top US lenders. The FICO credit scoring system currently leaves 26 million Americans’ credit invisible and another 19 million unscorable. With the rise of the digital age, the amount of data available has gone parabolic, along with ways to misuse it. A study by Penn State noted multiple ways in which social media data may already be misused for credit scoring in the future if unchecked. Current credit scoring providers cannot operate globally due to a vast majority of cultural, economic, and regulatory compliance differences and requirements. Every country has its own culture, and our culture builds the FreshCredit® Network of how we think about, spend, invest, manage, and utilize our wealth and credit. Copy-pasting models directly from matured countries like the US or China will not work.

1. History of Credit Protocols (ledgers, bureaus, scores) – TIME Magazine*
2. Discrimination – National Consumer Law*
3. Issues w/ Social Network For Credit Scoring – Penn State*

Access to Valuable Financial Tools

The significant benefits of financial identity and modern credit scoring are not for everyone. Globally billions of individuals are unbanked. Deloitte stated that the penetration of internet access had gained significant traction in the past few years due to mobile smartphones. Before wifi, running physical network lines through certain areas was very difficult. Even if an individual has internet access, many cannot obtain access to financial institutions. According to a study done by Stanford University, one of the main reasons lenders failed to offer lending to sub-prime borrowers was because of incomplete data, leaving billions more unable to utilize a modern credit scoring system to borrow needed funds. A second study conducted at Standford revealed the direct effect of implementing credit scoring increased the down payments more than 40%, significantly increased overall loan size, and reduced defaults by 15%. Globally over 3 billion people cannot obtain a credit card, and over 90% of the population in developing nations find it difficult to find debt financing options.

1. The Unbanked – Deloitte*
2. Liquidity Constraints for Subprime Lending w/ Imperfect Information – Stanford*
3. Credit Data – Modern Credit Scoring Affect On Lending Down Payments and Defaults- Stanford*
4. Defaults 35% of loans default in the 1st year

Even with all these issues currently plaguing the United States credit system, we have still managed to become the most powerful financial country on the planet through the deployment of leveraged revolving debt (credit and credit cards). The US alone generates more than 24% of the total GDP using the power of revolving leveraged debt. Most of this spending power is based on risk assessment protocols powered by credit scores, yet the US is only for 4% of the global population. This means we are possibly excluding millions if not billions of creditworthy individuals from the worldwide economy, which could potentially represent hundreds of trillions of dollars added to the total GDP.

Market Overview

Decentralized finance has seen a significant jump in available market liquidity in the past few years. Still, it is just a tiny percentage of the global lending market compared to centralized finance. DeFi is currently estimated to be around $80 billion in total value locked(TVL) vs. CeFi’s (centralized finance) $25 trillion held by JP Morgan alone. This gap represents the inherent risk perceived by centralized financial institutions. 

Even though decentralization has dramatically expanded the promise of an open, trustless ecosystem through the use of blockchain technology by creating an unbias, transparent, and efficient means of exchange, it has yet to be globally adopted by government regulators for many significant reasons. One of the most substantial and impeding factors is a standardized risk assessment based on financial identity. Simply put, no standard credit scoring system.

As there is no standardized risk assessment, leaving the lenders of the DeFi industry forced to over-collateralize lending offers in an attempt to mitigate the overall network risk. These offers range from 1.5X to 3X the capital lent, increasing the borrower’s risk exposure to the underlying asset.

Combing the perceived risk by centralized financial institutions and the inherent risk to the borrowers in decentralized finance creates a very high barrier for entry, which suppresses the astronomical growth potential decentralized finance offers.