Predictions and Reflections After the Bank Run Frenzy: Privacy, Credit, and Identification

Recently, the market has experienced a series of liquidations, and the demand for the following sectors may increase as a result: privacy, credit, decentralized identification, and reputation systems. This article analyzes the narrative possibilities by taking individual projects as examples.

1. The Importance of Privacy Needs

All accounts on the blockchain are represented by complex numbers and addresses, but through continuous tracking and analysis, the identities behind the accounts can still be discovered. Currently, there are a large number of data analysis tools on the market to identify whale accounts. To some extent, the blockchain does not truly protect privacy.

After experiencing multiple bull and bear cycles, the privacy track has seen some development and changes.

• Zcash provides protected privacy address (Z) and transparent address (T), which can be traded between the two types of addresses. However, there are trust issues.

• Aleo not only achieves asset transfer anonymity based on Zcash, but also includes functions such as payments, providing liquidity, governance voting, and identification. Only the interacting parties are aware of the details, and third parties cannot understand or exploit them.

• Aleo uses the ZEXE system to generate proofs during the execution of state transitions and bundles them into on-chain transactions. The transaction ultimately only contains proofs and does not include inputs.

• Aztec also employs zero-knowledge proof technology to address the privacy needs of Ethereum.

• Secret Network adopts Trusted Execution Environment ( TEE ) technology, which may develop faster.

Privacy needs to establish a large framework and ecosystem, based on which development and application creation can take place to meet the diverse privacy needs of different users.

2. Challenges and Opportunities in Credit Business

On-chain lending is still in its early stages, lacking a large amount of middleware and infrastructure. Some issues may require modular solutions, such as regulatory permissions, mature DID systems, reasonable on-chain credit algorithm models, and so on.

The core of credit lies in the construction of the credit system and the borrower's repayment ability. Currently, the credit system for credit business is more focused on off-chain evaluation, and the evaluation model is a black box, making crypto credit still a fragile business line.

Taking Maple Finance, TrueFi, and Goldfinch as examples, they differ in their credit assessment methods:

• Maple Finance adopts the delegated liquidity pool (Pool DeleGate) model.
• TrueFi conducts voting evaluations with DAO at its core
• Goldfinch selects a third-party partner team for review and evaluation.

The common point among the three is that they all rely on centralized people/teams for credit assessment, and there is still uncertainty regarding the debt assessment of super whales.

On-chain reputation and credit risk scoring are major challenges. Credit requires endorsement from authoritative governments, state machinery, or legal provisions, and cannot be created out of thin air. Currently, on-chain institutions are still searching for product-market fit ( PMF ).

However, debt has a restructuring cycle, and credit remains one of the important driving factors of DeFi. The interest rate spread between DeFi and traditional banks is large, creating borrowing demand. However, the over-collateralization model also carries some risks:

• May drain the liquidity of certain non-native assets on public chains.
• Bring the debt ceiling issue
• Easily forms a highly panic-driven bank run

Overall, for the cryptocurrency market that is still in the extremely dark forest stage, over-collateralization is a better risk control method.

3. The Importance of a Decentralized Reputation Scoring System

The flaws in the credit assessment system highlight the importance of DeFi native authentication systems and decentralized reputation scoring systems.

Taking ARCx as an example, it has designed a DeFi Passport ( with a score of 0-999 ), which generates a credit score based on the user's wallet interactions with various DeFi protocols. The evaluation criteria include multiple variables such as loans, liquidations, airdrops, and user behavior.

This on-chain behavior-based reputation system can bridge the gap between the traditional financial system and the DeFi ecosystem, establishing new identification and reputation for users in the DeFi world.

4. Building a Decentralized Identification ( DID ) System

We need to build the uniqueness and combinability of users' identity and data through the decomposition and datafication of "identification". A reasonable decentralized identity system should have the following characteristics:

• Trustless: Operates on any open network
• Flexible: applicable to any data structure defined by developers
• Highly accessible: Suitable for any open network and unique identifiers
• Pseudonym priority: Start using without creating an account
• Generative: Information accumulates over time to form a holistic identification
• Composable: Discovering and sharing information across contexts
• Separable and selective: Information can be encrypted, obfuscated, or fragmented.

We need a minimal protocol that establishes management and routing to trusted data, while leaving other aspects to the creativity of developers.

NFT3 is a project that attempts to realize this vision. It allows users to easily establish their own identification system while ensuring personal privacy and sovereignty. NFT3 also built a credit scoring system called "NCredit" to provide users with more on-chain rights.

Overall, after the bank run frenzy, there may be new development opportunities in areas such as privacy, credit, and decentralized identification. However, the market needs time to heal, and DeFi still has a long way to go. We need to continue building to provide better infrastructure and application scenarios for Web3.