Credora is bringing credit scores on-chain, underscoring its commitment to scaling on-chain credit markets and pioneering new lending primitives for DeFi.
Our initial partners for unlocking utility from this data are listed below, with many more to come:
Credora’s mission is to continue enhancing transparency in lending markets through its comprehensive credit assessments and technology-driven credit scores. Credora’s credit scores are benchmarked against credit rating agency ratings, allowing investors to assess the risk-adjusted returns of private credit deals and make informed decisions. These credit scores have facilitated over $1.5 billion in loans to date.
“Partnering with Credora allows Clearpool to integrate on-chain credit scores into our programmatic credit markets, enhancing loan efficiency and risk management. This collaboration sets a new standard for transparency in DeFi and opens up exciting opportunities for institutional borrowers.” — Jakob Kronbichler, CEO of Clearpool
Credora’s unique privacy preserving technology enables the inclusion of real-time data to help validate and monitor a borrower’s creditworthiness, fueling dynamic credit scores. In combination with the real-time data, multiple layers of automation ensure a seamless credit assessment process for both borrowers and investors.
“Our partnership with Credora brings on-chain credit scores to Mansa Finance, improving liquidity and transparency in secondary debt markets. This collaboration is a major step in empowering businesses and individuals in emerging markets with more efficient borrowing options.” — Mouloukou Sanoh, CEO and Founder of Mansa Finance
Why is Credit Important?
Credit markets are the foundation of the modern economy. Institute of International Finance estimates that global outstanding credit reached a record high of $313 trillion (Global debt Monitor, February 2024). However, outside of US government debt, on-chain credit activity remains limited. This is perhaps because of the permissionless ethos of cryptocurrencies and early DeFi, where there was a necessity to prioritize developing applications which have uniform rules for all users.
Although DeFi has historically successfully mitigated credit risk, the digital asset industry as a whole has not avoided it. Following the implosion of the industry in 2022, the market is now more acutely attuned to the credit risk which has thus far imbedded itself in market structure, whether it be to exchanges, custody solutions, prime brokers, or stablecoin issuers. Currently it is estimated around 20% of all crypto assets sit on centralized exchanges. Depending on the legal and technical set up, there is typically non-zero credit risk to any custodian, where a further 16% of all crypto sits. Tether (USDT — Market Cap; $112bn), Circle (USDC — Market Cap; $32bn), Bitgo (Wrapped BTC — Market Cap; $10.7bn) are deeply integrated into DeFi infrastructure, introducing other notable credit risks — see Circle in March 2023. While issuers all take different approaches in terms of asset and liability management, ultimately it is likely that structural counterparty credit risks remain.
For a period following the 2022 collapse, credit risk has generally been frowned upon in the digital asset sector. And although it is a good thing for the industry to mitigate credit risk where it is undesirable, the credit market exists for fundamental reasons. It is needed for the functioning of financial markets and the broader economy, enabling businesses and individuals to leverage future income for present investments, driving growth and innovation. Without credit, companies would struggle to finance large-scale projects, research and development, and expansion efforts, severely limiting productivity and technological advancements. Credit ultimately leads to capital efficiency for businesses, and allows markets to scale.
As the utility of on-chain infrastructure is increasingly recognized by traditional market participants, there are growing efforts to bring debt capital markets on-chain, leveraging the efficiencies offered by blockchain technologies. The maturing DeFi market, and the influence of growing traditional market interest, is driving the space towards increasing openness to credit.
Structured and transparent credit assessments play a fundamental role in helping credit markets thrive. This is true across sovereign debt, corporate debt, asset backed securities, consumer debt, and the entire spectrum of the credit universe.
Why are Credit Scores Important?
Systematic and transparent credit scores based on high-quality data are crucial for efficient capital allocation in the private credit sector.
Informing Capital Allocators
A credit score is crucial for various stakeholders, including investors and lenders, as it provides a standardized measure to assess the financial health and reliability of a business. It helps capital allocators evaluate the risk associated with lending to a particular business and benchmark it against other opportunities. All lenders and investors have different risk appetites and processes, but standardized credit scores can allow for a unified risk-to-reward analysis when comparing within a sector, or across multiple industries. Ultimately, it allows lenders to have large, diverse portfolios, and importantly, quantify their exposure such that it can be appropriately managed.
Increasing Efficiencies for Borrowers
Credit scores and ratings have played a significant role in helping businesses raise capital by providing a standardized assessment of creditworthiness that investors and lenders use to make informed decisions. Historical evidence shows that firms with better credit ratings generally have more favorable access to capital markets, allowing them to issue debt at lower costs.
Enabling Securitization
Credit scores play a pivotal role in the standardization and securitization of debt. Securitization, which involves pooling various types of debt and selling them as securities, has traditionally allowed for more diverse exposure to debt, and more liquidity for investors. Securitization relies on accurate credit scores to assess the underlying risk of these assets, where credit scores help to quantify and standardize. These characteristics are well suited for automated, rules-driven applications, for example, smart contract based applications.
Bringing Credit Scores on-chain
DeFi has found a clear product market fit with permissionless, non-custodial, transparent applications that facilitate lending and borrowing. However, to attract institutional borrowers, and enable sustainably high yields, credit is an important missing piece from the existing stack.
The current state of on-chain credit, particularly for private debt, has many points of friction. There are long off-chain underwriting processes, and in certain cases, limited transparency in the quality of the underlying borrower. Furthermore, there are complex and typically non-standard legal documents, alongside whitelisting processes.
Is it possible to bring the current on-chain credit experience closer to the permissionless experience? Although credit assessments are expected to remain a largely off-chain process, even as on-chain repayment history grows, the experience after which a credit assessment is available can be drastically improved.
After the issuance of a credit score, Credora envisions an on-chain universe where borrowers can seamlessly interact with a variety of credit-enabled protocols, where smart contract parameters dictate the amount of possible exposure, interest rate, and other variables based on the confirmation of access to the relevant metrics. For an improved user experience, the act of pushing scores on-chain can also be embedded with appropriate legal agreements and ensure borrowers agree to legal recourse for any protocol where they currently have, or have previously had debt.
A borrower publishing a score can be a one-two punch for protocols; allowing for quantification and standardization of risk in the smart contract itself, but also vastly improving the user experience and reducing the barrier for a borrower to interact with it. Moreover, increasing on-chain credit activity allows for a richer loan and repayment history to ensure a more accurate score.
Credora envisages multiple innovations to be built on top of credit scores on-chain, some of which are yet to be discovered. However, below are some that are currently feasible and Credora is working on with partners:
Programmatic Credit Markets
- Automated Loan Terms: Protocols can set interest rates, maximum pool sizes, maximum duration, and other parameters at the smart contract level, and abstract away the cumbersome UX for borrowers issuing debt.
- Hybrid Collateralized Markets: Credit scores can enable new variations on popular overcollateralized lending protocols, allowing scored borrowers access to higher LTVs.
Secondary Markets
- Liquid Debt Instruments: Credit scores can help drive more accurate pricing for secondary markets, driving liquidity.
- Debt as Collateral: Secondary market liquidity of debt can further the trend of yield bearing tokens serving as collateral.
Trading Enhancements
- Prime Credit Extension: Decentralized exchanges and DeFi Prime services can offer enhanced margin or credit terms to scored borrowers who qualify, allowing them to ensure better liquidity in a way that is transparent and adequately risk managed.
Credora believes in the future of on-chain credit markets. To serve a dynamic and ever growing private credit market, we are focused on delivering technology-driven credit scores efficiently, enabling scale. To date, that has consisted of privacy-preserving real-time data computation and AI-based automation. In our view, the next leg of scale comes from embracing crypto native properties; on-chain distribution of data, a seamless user experience and leveraging networks of information.
If you’re excited to build this vision of credit markets, reach out, we would love to collaborate!
