White Paper in a Nutshell — Define the Credit NFT of CreDA
Status quo and issues of DeFi
Many protocols in the DeFi world, especially the basic lending protocols, such as Compound, AAVE and MakerDAO, USDC, are based on complete or over-collateralization. If you study the bank’s wealth consensus algorithm, besides collateral, the core concept of its algorithm is “credit”. Benjamin Franklin proposed the core principle of the algorithm long ago: “Remember that credit is money”.
Without a credit system, DeFi will be limited to over collateralized lending and trading business, which leads to the system inefficiency and inability of innovation, but also puts the DeFi participants sometimes in an unfair position, for example, manipulated price liquidation.
On the other side, on-chain data has a natural strength in creating users credits: unalterable and with verifiable personal data ownership. However, in the current decentralized finance (DeFi), on-chain data is completely not used anywhere.Therefore, it is a very urgent task to upgrade decentralized finance.
The credit oracle CreDA, an indispensable innovation, will start a new era of credit-based DeFi on Ethereum Layer2.
From centralized credit to decentralized credit
. Centralized finance normally requires institutions to artificially guarantee the relationship between credit and loans. However, the core of CreDA’s decentralized credit finance is to directly mint the credits based on on-chain data into NFT assets, which enables decentralized credit rating and loan algorithms to run automatically.
Mint on-chain credit into NFT
CreDA uses credits based on on-chain data to mint NFTs and opens up more imagination in the field of DeFi. It will add more assets and accelerate the flow of assets in the blockchain world.
Credit NFT (cNFT) is generated on at least one Elastos DID address, which contains the user’s asset status and transaction records in various protocols. In fact, the information within the DID address can be regarded as a person’s assets and liabilities, consumption habits and sources of income,coin (like ELA) age in a wallet,etc. In this way, credit can be obtained for DID users.
The data aggregated under one Elastos DID can only be used to mint one cNFT while a cNFT can correspond to multiple Wallets addresses. The data under one DID address can be transferred to another new address through digital signatures, which is an untamperable process. Therefore, users who have multiple on-chain wallets can use their private keys to aggregate and combine all their on-chain data into one Elastos DID to analyze their credit score. Minting different levels of cNFT requires users to collateralize the corresponding CreDA token.
When a cNFT aggregates enough data, it can be used in a variety of scenarios. Users can obtain loans within the credit limit endorsed by cNFT. cNFT is comparable to the FICO score of the credit system in the US or the Ant Points of Alipay in China.
When the credit in an Elastos DID is minted into cNFT, on-chain credit starts to have the asset attribute. The asset attribute of cNFT is reflected in the asset mining (CreDA token is rewarded according to credit rating and storage time) in the CreDA system. This rewarded CreDA will be released slowly and linearly. If users want to accelerate this process, cNFT holders need to inject funds into the CreDA fund pool. The CreDA pool will assist cNFT owners to obtain the loans without providing any collaterals from some DeFi protocols such as FilDA. Once cNFT owners breach the contracts or are liquidated in other DeFi protocol, their cNFTs will be auctioned. Then both the income and the CreDA tokens that such cNFT have not yet been fully released will be used to compensate for the loss of the CreDA pool.
Use scenario: non collateralized borrowing
Non Collateralised borrowing is a unique feature in the CreDA platform. After having a cNFT, users are eligible to obtain the loan without any collateral (collateralize the assets of the CreDA fund pool to borrow on other DeFi protocols).
The Credit Risk Algorithm (CRA) interest rate is based on the interest rate in the lending market. CRA is named as the risk-free interest rate in the crypto world. If a user wants to obtain an unsecured loan, the user needs to collateralize the cNFT (the credit limit can be subdivided and respectively collateralized in different asset pools). Then the interest rate of each loan would be the risk-free interest rate plus the risk premium interest rate based on the specific risk. Here is an example: Suppose that the risk-free interest rate is an annual interest rate of 8%, and the risk premium interest rate is an annual interest rate of 12%. The total interest rate for
the unsecured borrowing will be an annual interest rate of 20% (12% + 8%). High interest rates are an important support for CreDA to build a strong fund pool.
Credit insurance mechanism
Financial risk is a crucial factor and can never be ignored. In the case of non collateralised borrowing and other scenarios where cNFT is used, how to guarantee the interests of the asset owners and reduce their risks? CreDA introduces a credit insurance mechanism that adopts mutual insurance to enable users to quickly obtain on-chain data credit, mint their own cNFT while ensuring that there are sufficient asset sources in the CreDA fund pool.
This mechanism may also grant the participants with better credit more privilege when a liquidation condition is met. They may have a grace period to keep the margin level or they may be even given a more favourable liquidation term, vice versa.
This credit system will enable massive LEGO innovation in the DeFi world.
Features of cNFT: Scalability
If CreDA’s cNFT retains enough interfaces to make it easily accessible by other protocols, cNFT can be adopted in various liquidity scenarios of DeFi.
When a certain protocol is using a specific cNFT with the user’s permission, it will write status information(such as unsecured loan) into the cNFT, which actually informs other protocols that the user’s credit limit has been used and how much
available credit limit is left. If other protocols want to use this cNFT, it needs to reassess the risks associated with its remaining credit limit.
Features of cNFT: Credit network (cNetwork)
After users mint their own cNFTs, they can further expand their own credit network (cNetwork). The function of cNetwork is to record the credit relationship between users without direct revenue management. With the expansion of cNetwork, CreDA can offer additional credit scores based on the analysis of on-chain data. The more users cNetwork reaches, the higher the utilization rate of the user’s credit limit, and the greater the chance of benefiting from participating in credit insurance.
Features of cNFT: Upgradability
In order to reward long-term members in the CreDA ecosystem, cNFT also has a feature of being upgradable. Users can band additional CreDA tokens to upgrade their own cNFTs. The higher the level of cNFT, the higher the credit weight in cNETWORK, and the higher the profit in the process of data mining. When the CreDA ecosystem is linked to an external ecosystem, users with high-level cNFTs will also be favored by the cooperation ecosystem.
The CreDA pool will be open to those who fully understand the CreDA credit system and are willing to bear the relevant risks in order to obtain higher interest rates. In addition to obtaining a return higher than the average among all the lending markets, these users will also receive CreDA tokens as the rewards. Ordinary cNFT owners can also speed up the production of CreDA tokens in the system by injecting funds into the CreDA pool. In the future, the CreDA pool will have the function of intelligent adaptability that includes intelligent cross-chain, automatic profit, and intelligent switch between different platforms, such as COMPOUND, AAVE, FilDA, and so on, in order to meet various borrowing and lending needs. In this way, CreDA provides users with the highest return on assets and the lowest interest rate, which is the main attraction to increase the source of income for the CreDA system.
cNFT trading market
Different from the ordinary NFT trading market, in order to ensure the trading value of cNFT, one single Elastos DID can only create or engage with one unique cNFT. Therefore, cNFT transactions will have a market demand for redemption, so we will design additional functions especially for redemption.
Long tail assets lending market
CreDA will also cooperate with some DeFi protocols which support various long-tail assets (non-mainstream tokens) to continually expand its traffic sources and asset types.
Integrate trusted computing and off-chain data into cNFT
CreDA’s trusted computing technology and credit rating will be developed by former-Tencent engineers in related fields. The goal is to utilize trusted computing to authorize the ownership of the off-chain personal data in daily life scenarios (such as the user data of Union pay) and connect the off-chain data to the chain with privacy protection. The trusted computing technology will become an organic component of cNFT. Once this goal is achieved, CreDA will become a bridge linking CeFi and DeFi.