Using Proof-of-Stake for a Decentralized Credit Bureau

Cryptoeconomics, when it works, creates a hothouse environment to improve legacy financial tools like credit assessments, leading to real consumer and economic gains.

AccessTimeIconSep 28, 2023 at 3:15 p.m. UTC
Updated Sep 28, 2023 at 10:05 p.m. UTC
AccessTimeIconSep 28, 2023 at 3:15 p.m. UTCUpdated Sep 28, 2023 at 10:05 p.m. UTC
AccessTimeIconSep 28, 2023 at 3:15 p.m. UTCUpdated Sep 28, 2023 at 10:05 p.m. UTC

At Spectral, we’re creating and incentivizing a network of modelers, creators, users and validators using proof-of-stake mechanics. The idea — similar to Chainlink (LINK) and The Graph’s (GRT) models — is to build a decentralized marketplace with a built-in feedback mechanism that ferrets out and discourages bad actors.

This article is part of CoinDesk's "Staking Week." James McGirk is a senior writer at Spectral Finance and the co-founder of Lonely ROCKS.

Our multi-asset credit risk oracle (MACRO) score is a machine learning model that weighs approximately 100 on-chain signals to produce a three-digit score predicting a wallet's likelihood of liquidation on an on-chain loan.The score is similar to the FICO score, and ranges from 300 (representing a very high risk of liquidation) to 850, representing a very low risk. It’s very similar to what you’d get from a traditional credit report, only instead of relying on Experian, Transunion and Equifax to keep tabs on your spending, you opt-in with your wallet.

The promise of an on-chain credit score is that it’s opt-in, completely transparent, and eventually, production of the algorithm generating the scores can be decentralized by incentivizing a competitive marketplace. Netflix pioneered the technique in the 2000s when they offered and eventually paid a million-dollar bounty to a team of data scientists who improved their recommendation algorithm by 10%.

The traditional model of a validator network is to pay rewards to a validator node for producing blocks and validating rewards, and punishing nodes – which is called slashing – by taking away their stake when they misbehave, which entail failing to maintain the node, behaving maliciously or other blockchain malfeasance. You can also use validation to incentivize a contest. For example, you can divide a network into modelers (who are machine learning engineers earning bounties by creating accurate models) and creators, who create data science challenges for the modelers to tackle, in this case an accurate credit score generated from on-chain information.

We also have validators, who vet the models for quality, and, after the contest ends, we have users who pay to use scores (i.e. machine learning inferences) generated from the winning models. The idea is to use crypto to nourish a flourishing ecosystem that grows extremely accurate machine learning models as a byproduct.

Cryptoeconomics, when it works, creates a hothouse environment where ideas are iterated upon by people all over the world. Creditworthiness assessment is just one use case, by building on a blockchain, smart contracts can build off-chain processing (such as zero-knowledge machine learning) onto the system, so nearly any data set can be encrypted and worked on given enough processing power and time — whether it’s tumor hunting, medical records inferences, insurance payouts, bail calculations even training robotic operating systems to serve hamburgers.


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James McGirk

James McGirk is a senior writer at Spectral Finance and the co-founder of Lonely ROCKS.