ARCx - One Year Later
Hey all! I can't believe it but it's been over a year since I introduced ARCx right here on DeFi Weekly in this post:
Since then it's evolved to something far beyond the scope I outlined in the initial post. Over the past 12 months, it's been a pretty relentless grind of getting it all together, with raising millions of dollars in funding, growing the team to over 12 full-time, and learning to recruit, manage and motivate a team of extremely talented folks.
Over that time you may kind of understand what I'm working on but it's probably a little blurry, so thought I'd provide some context as to where I'm in my journey and the work we're doing at ARCx.
Reputation - The Missing Lego Piece
To make it really simple, we're building out a crypto primitive for reputation, based purely on your on-chain activity. This reputation layer manifests itself through the DeFi Passport, a product that can create scores for different things based on your on-chain history and behaviour. In our view, the killer use case of reputation has always been credit throughout human history. Therefore we've been working on creating a crypto native credit score that allows you to achieve highly efficient crypto loans enabled via our own lending/borrowing platform.
Through that process of developing the credit score, we realised that the infrastructure that powers our credit score can be generalised out to provide a score for any dimension of reputation. Hence, we built generalised infrastructure that allows a magnitude of scores to be included in a user's DeFi Passport. Some examples of scores that we're really excited to launch and for others to build:
Protocol Loyalty - scores users based on usage of the product, participation in governance, token ownership history etc. This score can then be used to create differentiated yields, reputation weighted governance and/or capital efficiency in the core product
Networks - scores that rank a user's behaviour on a blockchain. You could have an Ethereum score that marks how much of an ETH OG the user is, a bot score that determines the likelihood this user is a bot or a cross-chain score that shows how cross-chain like the address is.
NFTs - scores that determine a user's behaviour with NFTs. Do they hold or flip them instantly? This can be used to create much fairer NFT distributions with a higher quality base.
Resumes - scores that show how experienced a user is in a particular dimension. We're going to be releasing a successor to the degen score that contains how much you are at the cutting edge of DeFi.
As you can see, the list goes on and on. I like to describe to people that with our technology, protocols become intelligent in a way they haven't been before. It's a fundamentally new way of interacting with DeFi.
Credit Scoring
As someone who has been involved with DeFi since the start of it all in 2018, I can confidently say that the amount of research I've done into DeFi protocol risk, game theory and crypto credit markets is beyond anything resembling normal. So with that, many of the readers here are probably curious as to how do you actually make credit scoring a reality and what does it mean in the context of DeFi?
Firstly, credit scores don't need to enable under-collateralized loans to begin with. That's a problem that can be solved longer term but in the short term there's a much larger opportunity to simply make borrowing markets more efficient in DeFi. That's the role of the credit score. If we can enable LTV ratios of 90%+ on assets that typically have 25-50% LTVs without increasing protocol risk, then we've been able to increase the amount of capital that can flow through DeFi. Users can't cheat or out-smart the protocol since there are liquidation penalties that go against their self interests in an over-collateralised system.
The key insight is that when opening a loan with your DeFi Passport, you're using your reputation as collateral. That's something that's never been done and why we're so excited to ship this.
Okay, so how can I as a user use this credit score to get more credit? We're a few weeks away from launching the credit score but it'll be alongside our own stablecoin, ARCUSD. Users with high credit scores will be able to borrow more ARCUSD against their collateral. It'll be pretty magical since rather than having a static LTV ratio as seen in most DeFi platforms, ARCx will have the notion of a LTV range dependent on the user. A higher credit score maps to a higher LTV ratio at a smart-contract level. As your credit score improves, so does your liquidation ratio essentially!
As we get closer to the launch of the credit score and ARCUSD, I'm happy to share more here!
Cross-Chain Reputation
This is probably the last point that I'm really excited to share with you all since it's going to push the boundaries of DeFi in a novel way. Typically cross-chain applications in DeFi are like completely separate instances that aren't interoperable in any way.
ARCx is going to be the first interoperable crypto application since all your reputation scores on your DeFi Passport are accessible to every chain the DeFi Passport is deployed on! That's right. If you have an Ethereum score, it's now accessible on every other chain natively. Your credit score isn't just from your Ethereum activity but rather your borrowing activity across all blockchains! It's hard to understate how magical this experience is and what it enables.
We've built out cross-chain infrastructure for EVM compatible chains and you'll be seeing cross-chain deployments also coming in the near future.
Closing
There's plenty that we're building out and we're very excited as a team to show what reputation will enable in DeFi. Good behaviour has very little reward in crypto and the most mercenary approaches often get rewarded which sets us all back in coordinating to create long term value together.
On a more personal note, thank you to everyone here who has been a reader. I'm excited to start getting back into the groove of creating more content, getting back to being a student of crypto and sharing what I learn along the way. This market has advanced so much and there's a ton that I'd love to get back to explaining and sharing with you all.
If you're a founder, investor, team member or engineer who would like to learn more. Please don't hesitate to reach out to me on Twitter @kermankohli :) My DMs are open.