The days of banks being the sole gatekeepers for lending are waning. With technological advancements, innovation in financial services and increasing demand from consumers, decentralized credit scoring is gaining traction as an efficient way to grant access to credit.
Decentralized credit scoring utilizes distributed ledger technology (DLT) which enables peer-to-peer transactions and real-time information sharing among network participants; making it a potentially more secure and equitable form of providing loans. But how exactly does it work? And just how efficient is decentralized credit scoring compared with traditional processes?
In this post, we’ll take a deep dive into what allows decentralized credit scoring systems to provide faster decisions while maintaining data integrity—all without the third-party intervention required by traditional models.
Traditional credit scores are far from optimal
Despite how straightforward it may seem, the idea of credit rating is far from perfect because it is centralized.
Organizations often referred to as credit bureaus are in charge of credit ratings. Transunion, Experian, and Equifax are just a few of the companies that may provide credit ratings on individuals. And companies like Moody’s and S&P Global are likely to evaluate governments and corporations.
Although credit agencies strive to evaluate borrowers’ creditworthiness in a transparent manner, there have been many instances of insufficient evaluations as a result of problems such the suppression of relevant information, stagnant research, deception, and human prejudice.
The clear requirement for decentralization
Many industries, particularly the financial sector, underwent radical change with the introduction of blockchain technology. As a byproduct of developing technology, decentralized finance (DeFi) has made it possible to conduct financial services through a peer-to-peer (P2P) system, doing away with the concept of a middleman or central authority.
Decentralized credit scoring is the concept of determining a borrower’s creditworthiness without the need of a middleman utilizing on-chain and occasionally off-chain data. The evaluation is carried out on a blockchain that is controlled by a decentralized P2P network of computers. A decentralized credit rating also eliminates the role of conventional credit bureaus.
How efficient is decentralized credit scoring? – A plethora of benefits
A borrower’s life may be significantly impacted by assessments of their creditworthiness. It is crucial to note the importance of making fair decisions in this case.
However, due to prejudice or inefficiency, traditional credit rating agencies frequently fall short in their attempts to fairly evaluate applicants’ creditworthiness.
Fairness is a benefit of decentralized credit rating. Because these assessments are performed by AI on blockchains outside of the power of any central authority, borrowers may be certain that their eligibility will be fairly evaluated.
Additionally, with decentralized credit rating, customer on-chain data is spread throughout a blockchain managed by a P2P system rather than being gathered and held on a central ledger. Because of this, it is highly challenging for hackers to obtain consumers’ data, as was the case with the 2017 Equifax incident.
The blockchain sector has improved financial world efficiency and security, from DeFi to decentralized credit scoring. Although decentralized credit rating is still in its infancy, the improvements already achieved make it clear that it will eventually develop into an even superior evaluation tool.
Decentralized credit scoring is a data-driven way to assess an individual’s risk of defaulting on a loan, and it has the potential to be more accurate than traditional methods. If you’re interested in learning more about how decentralized credit scoring can benefit your business, please contact us. We’d be happy to answer any of your questions.
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