On-Chain Credit Risk Score in Decentralized Finance
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arXiv
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| Main Authors: | , , , , |
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| Format: | Preprint |
| Published: |
2024
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| _version_ | 1866912292077043712 |
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| author | Ghosh, Rik Datta, Arka Aggarwal, Vidhi Sinha, Sudipan Sengupta, Rajdeep |
| author_facet | Ghosh, Rik Datta, Arka Aggarwal, Vidhi Sinha, Sudipan Sengupta, Rajdeep |
| contents | Decentralized Finance (DeFi), a financial ecosystem without centralized controlling organization, has introduced a new paradigm for lending and borrowing. However, its capital efficiency remains constrained by the inability to effectively assess the risk associated with each user/wallet. This paper introduces the 'On-Chain Credit Risk Score (OCCR Score) in DeFi', a probabilistic measure designed to quantify the credit risk associated with a wallet. By analyzing historical real-time on-chain activity as well as predictive scenarios, the OCCR Score may enable DeFi lending protocols to dynamically adjust Loan-to-Value (LTV) ratios and Liquidation Thresholds (LT) based on the risk profile of a wallet. Unlike existing wallet risk scoring models, which rely on heuristic-based evaluations, the OCCR Score offers a more objective and probabilistic approach, aligning closer to traditional credit risk assessment methodologies. This framework can further enhance DeFi's capital efficiency by incentivizing responsible borrowing behavior and optimizing risk-adjusted returns for lenders. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2412_00710 |
| institution | arXiv |
| publishDate | 2024 |
| record_format | arxiv |
| spellingShingle | On-Chain Credit Risk Score in Decentralized Finance Ghosh, Rik Datta, Arka Aggarwal, Vidhi Sinha, Sudipan Sengupta, Rajdeep Risk Management Decentralized Finance (DeFi), a financial ecosystem without centralized controlling organization, has introduced a new paradigm for lending and borrowing. However, its capital efficiency remains constrained by the inability to effectively assess the risk associated with each user/wallet. This paper introduces the 'On-Chain Credit Risk Score (OCCR Score) in DeFi', a probabilistic measure designed to quantify the credit risk associated with a wallet. By analyzing historical real-time on-chain activity as well as predictive scenarios, the OCCR Score may enable DeFi lending protocols to dynamically adjust Loan-to-Value (LTV) ratios and Liquidation Thresholds (LT) based on the risk profile of a wallet. Unlike existing wallet risk scoring models, which rely on heuristic-based evaluations, the OCCR Score offers a more objective and probabilistic approach, aligning closer to traditional credit risk assessment methodologies. This framework can further enhance DeFi's capital efficiency by incentivizing responsible borrowing behavior and optimizing risk-adjusted returns for lenders. |
| title | On-Chain Credit Risk Score in Decentralized Finance |
| topic | Risk Management |
| url | https://arxiv.org/abs/2412.00710 |