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Would you give up privacy for unsecured loans in DeFi?

An ambitious new decentralized autonomous organization (DAO) has developed a data service for lending platforms that tracks a user’s financial reputation in order to reduce the amount of collateral required for a loan.

It has partnered with Chainlink and the founder of this protocol, Sergey Nazarov, is an advisor.

Reputation DAO users have traditional financial data such as anti-money laundering and know-your-customer (AML/KYC), credit scores, and banking information associated with their account. The data aims to help reduce the friction of obtaining a loan from a decentralized platform, but raises questions about safety and the principles of zero-knowledge lending.

The Reputation DAO team told Cointelegraph that its connection to these traditional financial authorities is “vital in removing some of the trust barriers associated with undercollateralized lending.”

Decentralized Finance (DeFi) protocols like AAVE (AAVE) and Maker (MKR) require users to deposit at least 150% of the value of the loan they wish to take out. This over-collateralization protects the protocols from bankruptcy in the event of liquidations due to volatility, as the loans are originated via zero-knowledge smart contracts.

While Reputation’s DAO team said that “retail clients are more comfortable with algorithmic lending,” they also noted that “institutional interest is increasing rapidly.”

This institutional interest is illustrated by the $222 million in seed and strategic funds invested in DeFi protocols since March 15. according to to crypto fundraising tracker Airtable. Reputation DAO is one of those protocols and on April 13 closed a $4.7 million seed round led by DACM and AirTree Ventures.

But for many DeFi users, linking sensitive financial data to a blockchain-based lending platform raises security and privacy concerns. Some users may feel more comfortable posting higher collateral for a DeFi loan if the logs don’t have access to their information, keeping their identities private.

Reputation DAO assured Cointelegraph that its partnership with industry-leading information oracle Chainlink, which uses privacy protocol DECO, helps protect its users’ data.

Cointelegraph reached out to an active and successful DeFi investor who asked to use the name “Unseo” for his thoughts. He said he would be wary of using Reputation DAO to get a loan. He argued that such a service “would make the DeFi system more vulnerable” and that “rather than getting off the math, I would trust the judges of other participants’ creditworthiness.”

“Even though I have good credit, I’d rather not use a more vulnerable system to get a better usage allowance.”

Related: Getting Started: Essential Tips for Getting Started Investing in DeFi

Time will tell how DeFi users will react to Reputation DAO’s value proposition.

Richard Dement

The author Richard Dement