This past week, major credit reporting bureau TransUnion announced a partnership with Spring Labs and Quadrata to bring credit scoring to blockchain and make it easier for lenders to make more informed decisions about lending applications.
But what exactly is blockchain and how does this key credit information change how blockchain-based apps do business?
Blockchain and DeFi, explained
In short, a blockchain is a digital ledger that is shared across a network of computers. It’s made up of a series of blocks that contain data and are distributed throughout that network—making it difficult for hackers to alter or tamper with the data that these blocks contain. Blockchain is decentralized—meaning that the information contained within a chain is not controlled by a single company, bank, or organization.
One of the key features of blockchain is its ability to preserve anonymity while maintaining a sense of transparency. The information stored in each block is encrypted and can only be accessed with a special key. Unlike centralized financial institutions, transactions are not tracked and stored by one primary entity.
Many decentralized finance (DeFi) applications use blockchain technology to provide financial services like lending, trading, investing in cryptocurrencies, and more.
“A DeFi App is different from other apps as it operates and is accessible to anyone, anywhere, anytime through the basic use of an internet connection and without intermediation by traditional financial institutions,” says Gabby Kusz, CEO of the Global Digital Asset & Cryptocurrency Association.
Maintaining that sense of privacy is important to most users on DeFi apps. However, this level of privacy can pose issues as it relates to lending. Many lenders rely on your credit score and credit report as the basis for their decisions on whether to take you on as a borrower, and blockchain technology makes it impossible to access this kind of information.
How DeFi lending works
Unlike the process of filling out a loan application and submitting it to your bank, borrowing from a blockchain-based app or platform works a little differently.
“DeFi lending works on the basis of smart contracts, and users can lend their cryptocurrency to a lending pool which is controlled by the smart contract. The borrower can then access the pool and borrow cryptocurrency against their collateral. The terms of the loan, including the interest rate, collateral requirements, and repayment schedule, are set in the smart contract,” says Shant Kevonian, CEO and Founder of EtherMail, a Web3 email solution for anonymous and encrypted wallet-to-wallet communication.
“On the privacy front, DeFi lending platforms typically don’t require users to disclose personal information, such as their identity or credit score, as the loan is secured by collateral held in the smart contract. This allows users to maintain their privacy while still accessing the benefits of decentralized lending.”
So how is Transunion shaking things up? It's giving DeFi platforms a closer, more accurate look at your financial stats without compromising your privacy.
Transunion is providing credit scoring info to DeFi apps
TransUnion has partnered with Spring Labs and Quadrata to deliver off-chain credit scoring to DeFi and Web3 applications (internet applications based on public blockchains) for the first time. The credit data will be provided to these apps at the request of the consumer and will enable the delivery of the credit scoring data while maintaining the privacy of the consumer’s identity on blockchain.
With this information in hand, DeFi apps will be able to better assess the risk they’re taking on by lending to certain consumers, and potentially give consumers more favorable terms when they opt to borrow via a block-chain based platform.
“As more consumers and lenders move to blockchain to conduct business, it’s important to ensure that the balance is struck between the information that lenders need to assess risk and the privacy and anonymity expected by users of the technology,” said John Sun, chief executive officer of Spring Labs in a statement. “This new product featuring TransUnion’s identity and credit data at its core is a big step toward achieving that balance and allowing more lending opportunities on blockchain while minimizing risk.”
TransUnion is currently the first credit reporting agency to make this move, but it could signal a broader acceptance of decentralized platforms and lead more consumers to consider DeFi apps as a viable option for lending solutions.
“We see credit information on-chain as a key element for consumers to access more capital-efficient solutions in web3,” said Lisa Fridman, President at Quadrata in a statement. “It’s an important step to leveraging blockchain technology for essential financial use cases in the future.”
The takeaway
Blockchain technology is still a fairly new concept and can be difficult to grasp for many consumers. But as many major companies and financial agencies start to embrace blockchain, it’s important to know how it works and how it could potentially impact you and your personal finances.
