DeFi Protocols Need To Start Incorporating Credit Scores Into Its Operations

The success of the growing Decentralized Finance (DeFi) space continues to be an important topic of debate in the Blockchain. Since 2018, when MakerDAO was created as the first DeFi protocol, the space has continued to thrive. The majority of the native tokens of the various protocols in the young DeFi space have also continued to thrive, as investors are continuously thrilled by the space.

The gross market capitalization of the DeFi space, as of January 2021, was pegged a little over $20 billion, an increase of 1,000% compared to its figure one year before that time. However, many analysts believe that the protocols in the space need to replicate the modus operandi of traditional finance firms by incorporating credit scores in their operations.

Over-collateralization is a big problem for DeFi Protocols

DeFi protocols are crypto lending platforms that offer traditional finance instruments to many Blockchain users, mainly at an interest rate. These protocols also allow crypto holders to participate in staking programs, offering them mouth-watering rewards on their stakes. Many analysts’ expectations from the space have continued to be high, as many have touted the DeFi protocol to be the future of traditional finance.

However, many analysts believe that the Blockchain terrain will further improve its values if it copies traditional finance firms by introducing credit scores check into its services. Many analysts believe the need for a credit score check will reduce the collateral requirements of many protocols in the space.

Collateral requirements in credit services have always been a draw back even in traditional finance settings. However, many of these traditional credit firms have now sought after Credit scores, as they tend to provide an overview of a borrower’s affairs. Alternatively, many crypto analysts believe that DeFi protocols should follow suit, as the need for DeFI users always to provide collaterals might hamper the growth of the developing space.

The onus falls on Ethereum, Binance Smart Chain, and Co

While the calls for credit ratings and scores are what many analysts feel will improve these DeFI protocols’ fortunes, it appears that there is a need for data analytics and compilation. Many of these DeFi protocols are being hosted by Ethereum, Binance Smart Chain, and TRON network, and crypto analysts feel that these platforms should provide credible lender history to the protocols operating under their platform.

This information is provided to the DeFi protocols, will enable them to see their prospective clients thoroughly, and as a result of this, reduce the need for collaterals. However, while the crypto analysts’ suggestions are valid and hold water, there is no update as to when or if DeFi protocols will adopt the credit scores approach. However, the booming space is expected to continue to thrive as these protocols’ services continue to be vital to the Blockchain space.

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