But even that could extend the definition of “decentralized lending.” Users often had to reveal more information about themselves than necessary. Now, that may be starting to change.
Polygon has launched Polygon ID, a decentralized and private identity service for web3 and DeFi. The identity platform uses zero-knowledge (zk) cryptography, a technology that can prove the validity of data without revealing other personally identifiable information.
“This provides a privacy-focused means for users to verify their credentials and identity in web3 without having to store data with centralized third parties,” Amit Chaudhary, head of DeFi research at Polygon, told BeInCrypto.
“The ID is linked to documents such as a passport or driving license… to confirm the user’s true identity. This information is then cryptographically secured on the blockchain using a hash function that obscures the data,” he added.
Those who wish to verify a user’s identity can do so but cannot see any personal information, Chaudhary said.
However, in the past big tech has failed to protect personal information. There has always been a concern about private companies collecting biometrics in a crypto industry that largely continues to operate outside regulatory oversight.
Decentralized Credit Scores: Redefining DeFi Creditworthiness
A credit score determines whether lenders can give you money, at what interest rate, and up to what limit. In traditional finance, your score represents a number taken from an analysis of your personal history, including income and even love life.
The number is usually issued by a central authority such as a credit bureau. But things are a little different in decentralized finance, or DeFi. The burgeoning industry reaching over $200 billion in the total value of locked cryptocurrencies in 2021.
As the name suggests, there is no central authority in DeFi. It’s a deliberate design meant to cut out the middleman, by encouraging peer-to-peer (P2P) transactions. But the ingenious plan had unexpected results: how to define creditworthiness while maintaining privacy.
Lenders have had to implement a variety of tools like on-chain transactions and off-chain activity to measure creditworthiness, observers say. However, this has not completely resolved the question of a reliable credit rating system for a truly decentralized ecosystem.
Occasionally, users have been forced to reveal more information about their personal lives than necessary. Furthermore, the lack of trust in DeFi has caused lenders to be much more cautious about who they lend to. Often asking for obscene amounts of guarantees.
This may be why loan-to-value ratios in decentralized finance are always high, around 50%. It means that anyone looking to borrow $1,000 would have to put down $2,000 as collateral. And continue to do so if the price of the borrowed asset has fallen, to avoid liquidation.
Amit Chaudhary said that Polygon ID, the so-called private identity layer for web3 apps, could make decentralized credit scoring possible and easier. She dismissed concerns about intrusion into user privacy, something that has crippled Worldcoin’s global currency ambitions.
“Although (Polygon ID) uses biometric information for verification purposes, that data is not provided to anyone unless the user gives explicit permission,” he said, adding:
“Giving users control over their identity and personal data is a way to enable social coordination and take back power from third parties.”
Threat to privacy
But some Bitcoin and cryptocurrency experts aren’t impressed. They talk about the risk of fraud and the lack of real safeguards on the data collected. Analysts have pointed to the threat posed by Polygon ID to privacy and decentralization as an affront to the founding principles of Bitcoin.
“In general, the principles of zero-knowledge cryptographic technologies allow you to worry less about your personal data,” Nikita Zuborev, chief analyst at crypto-to-fiat exchange BestChange, told BeInCrypto.
“But the issue of a leak from a certain ‘certificate authority’ is also relevant. The zk-proof proposal just eliminates the problem of insufficient privacy for public records. Which is the blockchain, but an organization still receives personal data.”
“Your data will be shared, albeit without the ability to be publicly matched with the wallet and track your activity in the community in the future,” he added.
Inevitably, comparisons have been drawn to Worldcoin’s ill-fated plan to scan the irises of a billion people in exchange for free money. The project has been roundly criticized as a disaster waiting to happen for unethically collecting people’s biometric data.
Iakov Levin, founder and CEO of cryptocurrency investment platform Midas Investments, predicts Polygon ID will be “truly transformative in the medium to long term.” However, he will first have to overcome lingering trust issues.
“While the innovation is impressive, it could still encounter unique resistance from its target users,” Levin told BeInCrypto, citing the Worldcoin debacle.
“Polygon ID products are intended to help people integrate their identities and protect them from unauthorized third parties, [but] a lot of education will have to be put in place for the public to understand its true value proposition.
Alexander Tkachenko, the founder of VNX, a European platform for tokenized precious metals, told BeInCrypto that Polygon ID is “not compatible with current rules and regulations.”
“So interaction with centralized actors cannot be avoided if the system is to work and be accepted outside of DeFi,” he explained.
“There are several initiatives that are trying to solve the contradiction, the most notable of which is OneBoard in Liechtenstein, but it is a difficult problem to solve.”
Data honey pots
Decentralization is a key aspect of cryptocurrency. Eliminates the need for a central authority to determine what is and isn’t valid data. That means no single point of failure, be it technical, moral or political.
Currently, there are hundreds of thousands of “honey pots” for hackers in every database. This contains user data that companies around the world have stored, according to observers.
“A perfect world would eliminate the need for these easily exploitable centralized data silos.
Self-sovereignty-identity solutions [like Polygon ID’s] it is the future of web3 and digital business alike,” Simon Shaber, chief business development officer at DeFi protocol Spool, told this publication.
Amit Chaudhary, the head of Polygon at DeFi Research, said he expects that as more and more websites have begun removing social logins from their platforms for privacy reasons, “logging in with your Polygon ID will soon become a reality.” “.
He also revealed that “our technology has been integrated into the next version of the smartphone ‘Nothing'”. He hopes that the identity system will also become part of the DAO infrastructure, replacing token-based voting mechanisms.
“Voting rights can also be tied to merit, credentials and commitment rather than based solely on how much equity you have,” he said. Polygon (MATIC) is a layer 2 protocol on Ethereum.
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