Reputation, how we are viewed by the world, is an area that fascinates me, it’s an area that currently exists in our little crypto world but is not utilised like in the real world. I believe that it can and will be used in the not so distant future. Let me explain.
Reputation in Real Life
We live in a society where reputation is everything. It gets you places. Jobs are more likely obtained through personal relationships over a cold application form. Trust is what makes us human and we are more likely to trust someone who’s got a good reputation than an unknown.
In finance, loans can be arranged by taking in various factors like payment history, amounts owed and loan length. This is data we already have available in the blockchain world.
In the real world there is no way around this, you can’t create a new identity and build another reputation from scratch when you want to (this ain’t Hollywood). So you have to play by the systems rules or forfeit the benefits.
Warren Buffet puts it very succinctly for us:
“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently”
Reputation on the blockchain
When it comes to crypto and particularly Decentralised Finance, reputation doesn’t count for much. We are all just a 42 character 0x address treated in the same way. As this is the case we can take on the maximum risks we like without a care for the systems we are operating within and the applications we are operating with, all for the goal of financial gain. It’s a zero sum game.
I can default on my loans without blinking an eye, yes I get liquidated and would lose my collateral but what about my reputation? The below scenario is typical behaviour in DeFi:
ARCx Discord- An account complains about getting liquidated and missing out on farming yield. A community member who cares about reputation takes a stand.
I can farm and dump governance tokens playing the game of get in first and get out as soon as the herd arrives. This has been the case since last years “DeFi summer”, but ultimately it’s the same players who can game the system and get there first.
The research team at Nansen had some interesting insights into yield farming that highlighted the mercenary culture:
A whopping 42% of yield farmers that enter a farm on the day it launches exit within 24 hours. Around 16% leave within 48 hours, and by the third day, 70% of these users would have withdrawn from the contract.
If you want to dive deeper, check out @yoitsyoung’s research piece on this:
These actions are Zero Sum. They are acceptable and they are actively promoted with the current incentives in place.
Reputation is already here
Who remembers the “Degen Score”?
When Atomic Blue launched its wallet analysis site, it went viral. Everybody wanted to share their score (if it was high enough!) It was a badge of honour to have been rugged by Andre, and to have entered the Degen citadel.
This was a simple construct but it proved that there is a trend of wallets out there building a rich history, an on-chain reputation. And it resulted in many anons applying for and getting employed through their Degen Score.
Anil Lulla @anildelphiDidn’t expect this to blow up like it did. In less than 24 hours, I’ve received over 60 DMs from people all around the world and scheduled 10 interviews for the next week. There’s no doubt in my mind. Projects like @atomicblue_ and @rabbithole_gg will be the new LinkedIn. https://t.co/ZkNcKHjb0b
I’ve seen a huge uptick in people using their ENS names on Twitter, Discord and Telegram. In a similar fashion, NFT’s like CryptoPunks have been used as avatars. Shout out to the chad that is Limzero, the perfect example of an anon with an on-chain identity and a serious reputation.
It’s clear to me that reputation is here, we just don't know how to utilise it, yet.
The DeFi Passport
With this rich history available why not use it, celebrate it and reward it. Play Positive Sum Games. The current incentives have been in place to reward any behaviour on DeFi protocols. Maybe it bootstraps TVL and helps climb that DeFi llama list. But why not incentivise positive behaviour? Why not, in the words of ARCx founder Kerman Kohli:
Restore value to reputation and identity on-chain
The decentralised bank of ARCx in their Sapphire release have come up with the novel idea of assigning a DeFi Passport to each wallet. The first leaf of the passport is the “Credit Score” determined by the wallets borrowing history. If the account is exhibiting “good” borrowing behaviour they will be rewarded with a better credit score. Some factors that will be taken into account are; length of the loan, liquidation history, borrow size and repayments during volatile conditions. All this combined will reveal a score from 0-999. The credit score can then be used to determine the collateral ratio for borrowing on the ARCx platform. A higher credit score will lead to a better collateral ratio and thus more stable coin can be borrowed. Rewarding good behaviour.
The possibilities are endless from here as the DeFi Passport can incorporate various other "scores” from the on-chain data that’s available. One of the most obvious and ultimately sought after iterations would be the “Yield Score”. Where farmers would be scored on their previous activities. These scores could then be used to unlock higher yields, targeted airdrops or other such rewards for the more loyal farmer. The game can become a lot more complex through aligning incentives and could ultimately lead to more tokens in the hands of targeted holders who have a positive reputation.
There is a lot of nuance to this area and it will need to be carefully thought out but personally I think that incentives to encourage “good behaviour” are a step in the right direction and can benefit projects who are distributing tokens.
One of the problems with this type of reputation analysis is the ability to change ones address with the stroke of a keyboard. A fresh wallet is the solution to a bad score.
I think this is missing the main objective. The goal is to reward good behaviour, rather than chastise bad behaviour. If each account starts from zero, it’s the accounts that are adding value that can be receiving value. That can be a very powerful thing and these positive sum games will make the space a much better place to operate.
There’s also an argument on how this introduces permissions; “This is centralisation bro…” and I think Fiskantes has a nice take on this:
The rules can be set but that doesn’t mean you have to play within that system.
With the data available on the blockchain, why not utilise it and start rewarding the behaviours that you want to see from your protocol users or token holders?
Credit scores, yield scores, even governance scores, are just the tip of the iceberg.
If enough incentives are in place I believe that the DeFi world can be made a lot more positive than the current iteration.