<aside> 📚 Credit scoring is the principle of providing some level of trust or authenticity into a transaction to prove 1 parties ability to pay it back.
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<aside> 📚 You wouldn’t just lend someone £1000, if you knew they wouldn’t have the ability to pay it back, would you.
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<aside> 📚 The same works in web3, you could either put up a higher collateral than your loan e.g. ETH is £1200 and you take out a loan for £1000, therefore you are collateralised by 120% (which is the standard practise in web3)
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<aside> 📚 Or you can use some form of credit scoring to determine a borrowers ability to pay it back.
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<aside> 📚 Not only does it allow a lender to be more confident in loaning, it also allows them to give more competitive deals which in turn attracts a more wider customer base.
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<aside> 📚 The main critics around it, point to the KYC (know your customer) dilemma, particularly for off-chain data (open banking analytics) since hard-core defi experts claim it “ruins the point of decentralisation in the first place”
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<aside> 👇 Check some of our favourite resources to get started on what credit scoring is all about
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