New DeFi ‘passport’ could enable under-collateralized crypto loans

Decentralized finance (DeFi) protocol Arcx has announced the launch of Sapphire v3, a DeFi passport allowing crypto users to pseudonymously build and verify their reputation on-chain.

Announced June 2, the DeFi passport will score users on a scale between 0 and 1,000, with Arcx advancing that the passport “incentivizes reputation-building and curates on-chain identity into DeFi.”

In the absence of a DeFi passport, Arcx asserts that “protocols are left to treat every user the same, occasionally giving preferential consideration to wallet size, institutional backing, or restrictive KYC.”

Arcx expects its passport will be integrated onto many DeFi protocols, predicting Sapphire will allow projects to offer “low-collateral loans and high-yield farms” targeting users with high credit scores. As such, Arcx’s passport could facilitate growth in the emerging sector of DeFi-powered under-collateralized loans.

Speaking to Cointelegraph, the CEO and co-founder of institutional under-collateralized loan protocol Maple Finance, Sidney Powell, commented that “Arcx’s passport will help bring under-collateralized loans closer for retail DeFi users.”

Although Powell stated “there is no doubt that stickier reputations and identities would be positive for retail under-collateralized loans,” he speculates that the use of zero-knowledge proofs could bolster the passport’s adoption “by encouraging users to share off-chain information about themselves in the confidence that they maintain confidentiality.”

Powell added that the Sapphire passport should consider a loan’s “affordability,” stating:

“An address may have had a great record of repaying $10K loans on Compound, but how creditworthy would they be on a $250K loan? This is something Arcx can address over time with more data.” 

Looking forward, Arcx hopes to evaluate individual scores for a range of criteria, including their “Airdrop Score” and “Yield Farming Score” — which estimate the likelihood of an address holding onto airdropped or farms tokens over the longer term, and a “Governance Score’ that assesses whether an address is likely to participate in on-chain governance.

The protocol also aims to provide “Trader Scores” intended to ascertain whether a user is employing bots to execute trades, with Arcx suggesting DEXes could offer reduced trade fees to addresses verified not to be using bots.

Arcx also revealed it recently raised $1.3 million from top crypto investors including Dragonfly Capital and Scalar Capital, bringing its total sum raised to $8.2 million. Tom Schmidt of Dragonfly Capital stated:

“DeFi today is like the Wild West. People can walk up to any random protocol, front-run users, rack up a bunch of bad system debt, and bounce over to the next town. If we’re going to build a new global financial system, we’re going to need something better than the pseudonymous systems we have today.”