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

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

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

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.”

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

Sidney Powell, the CEO and co-founder of Maple Finance, commented that Arcx’s passport will help bring under-collateralized loans closer for retail DeFi users. Powell also 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 further 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.” 

Arcx expects 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.

In addition to that, 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 and not to be using bots.