How do you build trust between anonymous, decentralized entities? This conundrum is at the heart of efforts to allow decentralized finance (DeFi) and Web 3 to meet their potential. Without a central party to oversee the transaction or visibility into who’s on the other side of the trade, it’s hard to trust that the transaction will take place. It requires a leap of faith.
One way to turn faith into something more empirically trustworthy could be a combination of non-fungible tokens (NFT) and social graphs. Social graphs are a model or representation of a social network and how the various nodes relate to each other. By layering on a system of NFT rewards based on transaction history, protocol participation and governance adherence, trust can be built in a system that remains decentralized and anonymous.
How would this work in practice? First, there would be a distributed ID that displays a user’s identity, represented by a wallet address. When this wallet address interacts with different DeFi protocols, it will transmit an entity that represents the attributes of its owner, for example, if they have been making good profits, if they have high participation in some areas or even if they have a good reputation by being present on some committees.
These attributes can attest to the quality of the person behind the wallet, without giving away his or her identity. It’s not something that can be bought or sold. Rather, it’s earned through transactions and participation. It goes back to the adage that you can judge someone by their actions, not by what they tell you about themselves. Show, not tell.
This works particularly well with DeFi. In social graphs, users are connected to all kinds of different DeFi protocols. When a user interacts with them, the protocols will contribute the data to the social graph system via an NFT. So when users log their wallets into a new DeFi protocol and connect with this system, the new DeFi protocol will recognize what they have done in other protocols. This means the protocols will be able to layer this data into user profiles and then categorize different kinds of users, allowing them to give special rewards or a different, better user experience.
It’s instructive to look at the difference between the social graphs of Web 2 and Web 3. The Web 2 social graph is focused on improving the flow of information and making it as efficient as possible. It’s all about making it as simple as possible to share and navigate information and intelligently pushing the information where it’s needed.
What Web 2 is for information flow, Web 3 is for capital flow. Web 3’s social graph allows capital to intelligently flow where it’s needed. The algorithms in the graph will use the attributes embedded in the NFT to automatically route the capital to where it needs to be, at the right time and in the right place. And it will do this through transactions and transaction analysis.
Open Leverage is building just such a dapp that will plug into and analyze these social graphs. This will be made available to other DeFi platforms so they will not have to code their own systems every time they build a new protocol. The whole system becomes an automated counterparty risk assessment tool that works in a decentralized Web 3 environment.
No one has yet been able to build a DeFi system similar to the credit scoring system in traditional finance because, quite simply, no one has been counting and analyzing transaction histories in blockchains. With this new system, users will be able to earn NFTs via their volume of transactions and their overall participation. It can be seen as reputation mining. And it will bring new levels of trust – and automation – to the Web3 ecosystem.
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