An ambitious new Decentralized Autonomous Organization (DAO) has introduced a data service for lending platforms that records a user’s financial reputation to reduce the amount of collateral needed for a loan.
It has partnered with Chainlink and the founder of this protocol, Sergey Nazarov, is one of the first backers.
Reputation DAO users will have traditional financial data such as anti-money laundering and know-your-customer (AML/KYC) data, credit scores, and banking data tied to their account. The data is designed to help ease friction when obtaining a loan from a decentralized platform, but raises questions about security and zero-knowledge lending principles.
The Reputation DAO team told Cointelegraph that its connection to these traditional financial authorities is “extremely important in removing some of the trust barriers associated with under-collateralized lending.”
Decentralized finance (DeFi) protocols such as AAVE (AAVE) and Maker (MKR) require users to deposit at least 150% of the value of the loan they wish to take out. This overcollateralization protects the protocols from insolvency in the event of liquidations due to volatility since the loans are made through zero-knowledge smart contracts.
While the Reputation DAO team said “retail consumers are becoming more comfortable with algorithmic lending,” they also pointed out that “institutional interest is growing at a rapid rate.”
This institutional interest is clearly demonstrated by the $222 million in seed and strategic funds invested in DeFi protocols since March 15 according to the crypto fundraising tracker air table. Reputation DAO is one such protocol and closed a $4.7 million seed round on April 13 led by Chainlink co-founder Sergey Nazarov and AirTree Ventures.
But for many DeFi users, tying sensitive financial data to a blockchain-based lending platform raises security and privacy concerns. Some users may be more comfortable posting higher collateral on a DeFi loan if the protocols do not have access to their information, thus keeping their identity confidential.
Reputation DAO assured Cointelegraph that its partnership with industry-leading information oracle Chainlink, which uses the DECO privacy preservation protocol, helps keep its users’ data secure.
Cointelegraph reached out to an active and successful DeFi investor who asked to call himself “Unseo” for his thoughts. He said he would be wary of using Reputation DAO to help secure a loan. He argued that such a service would “make the DeFi system more fragile” and that “I would trust the judges of the creditworthiness of other participants instead of making calculations.”
“Even though I have good credit, I prefer not to use a weaker system for the convenience of having better usage allowance.”
Related: Getting Started: Basic Tips to Start Investing in DeFi
Time will tell how DeFi users will react to Reputation DAO’s value proposition.