Spectral Finance: Building Programmable Creditworthiness

Readers of Upgraded Points typically have a traditional credit score, a number given to you between 300 and 850 from the 3 main credit bureaus (Equifax, Experian, and Transunion) that is used to determine your level of credit risk to financial institutions based on your previous payment history, your credit utilization, years of credit history, and more.

But with the growing adoption of cryptocurrencies and the use of DeFi (Decentralized Finance) protocols, Spectral Finance is developing infrastructure for assessing credit risk in a not-too-distant future where the majority of financial transactions might occur on-chain (as in on a blockchain).

Table of Contents

What Is a MACRO Score?
Why Might This Be Useful?
- Assessing Credit Risk for the Un-Banked and Under-Banked
- Assessing Credit Risk in a Decentralized World
Final Thoughts

What Is a MACRO Score?

Spectral’s solution for an on-chain credit score is a MACRO score, short for Multi-Asset Credit Risk Oracle, and would represent one’s credit standing in a world of decentralized finance.

Your MACRO score is calculated using many different pieces of on-chain transaction data. This data is then grouped into 5 categories: payment history, liquidation history, amounts owed and repaid, credit mix, and length of credit history.

Spectral Finance MACRO score — Screenshot from the forthcoming Spectral app. Image Credit: Spectral Finance

To provide some familiarity, your MACRO score will range from 300 to 850, just like your FICO score. Further, your on-chain transaction history is unique, and so is your MACRO score. While roughly based on the 5 categories mentioned above, for some individuals, calculating MACRO scores may involve some additional procedures depending on one’s transaction history.

Why Might This Be Useful?

If this is the first time you’re hearing about many of these topics, you might be wondering, “Why is any of this necessary?” There are 2 standout reasons.

Assessing Credit Risk for the Un-Banked and Under-Banked

Traditional credit models really only apply to people who are borrowers — i.e. those that use credit cards, have home and auto loans, etc. But how do you assess credit risk for non-borrowers, or even for the 1.7 billion people worldwide that are unbanked?

A goal of the decentralized finance movement is to provide more financial inclusion to those that have been left out of the legacy institution. As long as an un-banked person has internet access, they could provide on-chain data like their income/employment status, bill payments, and transaction history, which would allow Spectral to model a credit risk profile without needing a bank account or established credit lines.

Assessing Credit Risk in a Decentralized World

Decentralized finance is backed by open source applications, and allows all market participants to make financial transactions without requiring a central third party to oversee those transactions. Due to this, the world of lending and borrowing is much more fluid than traditional finance.

An individual might make multiple loans to multiple parties without a fixed repayment schedule, and without knowing exactly who is on the other end of the loan — sounds like a risky proposition right? This causes DeFi loans to be highly over-collateralized, often requiring collateral amounting to 3 to 4 times the loan amount, and also come with some large interest rates — a system that is both inefficient and only beneficial to those with enough capital to afford such loans.

Using Spectral’s MACRO score might allow lenders to make better decisions about who they lend money to by tying that risk to a user’s open and verifiable on-chain activity.

Final Thoughts

One thing is for certain, if the world is to transition towards decentralized finance, having the ability to assess credit risk through programmable creditworthiness certainly makes sense. In fact, many people must feel similarly as Spectral recently raised $6.75 million in funding from the likes of Galaxy Digital, Polychain Capital, Social Capital, and more. Only time will tell whether or not what Spectral is building could become a game-changer for creditworthiness.