When on-chain behavior is quantifiable, the Web 3.0 credit system will arrive

Original author: Tangyuan, Honecomb Tech

At the end of August, Ethereum founder Vitalik Buterin announced that he would release a new book titled "Proof of Stake" within a month. This book documents over a decade of his published writings, and both digital and physical versions will be released simultaneously. Before the release, users can obtain the digital version and a commemorative NFT signed by him through donations on the Gitcoin platform.

This commemorative NFT is a bit special; it is non-transferable. This differs from the NFTs we commonly see under the Ethereum ERC-721 standard and is a practical implementation of the "non-transferable token" mentioned in Vitalik's May paper "Decentralized Society — Finding Web3's Soul." He views it as a "Soulbound Token."

The abbreviation for Soulbound Token, SBT, is translated as "soulbound token," which sounds a bit mystical. In fact, it refers to a non-transferable, non-financialized token that is bound to a user's wallet address. To put it simply, this type of token is like being tied to your soul and cannot be sold.

Soulbound originally comes from gaming, specifically from "World of Warcraft." In this game, there is an item known as a soulbound item, which is bound to a player's character and cannot be traded, transferred, or gifted to other players; it can only be used by the owner. SBT borrows from this concept, meaning that once a user's wallet address possesses an SBT, it acts as a label for that address and will always follow the wallet.

What value does SBT hold? What role does it play in the Web3 world?

Conceptually, SBT has uniqueness; Vitalik's signed SBT encapsulates his reputation in a non-transferable NFT. This practice seems to explore a credibility mechanism for Web3.0. When reputation and credibility are formed as non-transferable tokens, although they cannot be traded, they are linked to an address, allowing the outside world to evaluate account credibility through the SBT label, helping users establish identity reputation and social value systems in a decentralized world.

Currently, blockchain and its applications primarily involve financial assets (tokens), with on-chain activities mainly focused on lending, trading, and other financial applications. Decentralization brings about free trading behavior, but if freedom lacks credit assurance in the financial world, problems arise, as reflected in "bad debts." At present, the social trust relationships among on-chain users remain in an unencoded stage. More applications requiring social evaluation lack a foundational development.

In the Web2 world, users' social reputation and value are quantified and displayed by platforms. For example, a Douyin influencer's follower count, video views, likes, and fan numbers reflect the value of their account. However, in the current Web3 world, there is still no quantifiable way to measure on-chain user behavior, let alone economic value. The emergence of SBT will lay the groundwork for exploring on-chain behavior records and encoding, and it may even encode users' credit records from the real world onto the chain, jointly constructing users' identity credibility on-chain and off-chain. For instance, a user's on-chain address can bind SBT tokens for personal education, work history, medical records, real estate, etc., enriching their personal labels, and even SBT-ifying their consumption behavior, credit status, and asset situation, forming an on-chain version of "Sesame Credit Score."

Before the concept of SBT emerged, developers were already exploring how to analyze users' on-chain behavior to locate value, and some user behavior profiling tools began to appear. SBT may help developers create more user evaluation tools. This issue of Web3 Hive will sort out representative products in the on-chain credibility track.

Everything can be NFT, but can on-chain behavior work?

Labels exist in our daily lives. In the Web2.0 world, your browsing data in apps or websites is your online label. The internet's big data analyzes your data labels through algorithms to create user profiles, then recommends content or ads based on those profiles. However, this data is controlled by centralized internet platforms, which use it for profit, leaving users with minimal rights over their data.

In Web3.0, on-chain labels are the behavioral data records of your wallet address interacting with DApps. For example, if you borrow money on Aave and Compound platforms without ever having a liquidation record; your contribution amount to the liquidity pool when you first launch a DeFi application, and your on-chain voting history can all form labels; your records of purchasing and trading NFTs will also create labels.

On-chain behavior is important; it is hidden in the user data traces across various DApps. Some blockchain big data companies have begun to label certain behaviors, such as money laundering. These labels assist in tracking illegal activities. Marking bad behavior can prevent wrongdoing; but is marking good behavior valuable?

The answer is yes. Good on-chain behavior records can serve as a reflection of credit, which is significant for on-chain finance. DeFi lending can not only determine how much you can borrow based on collateral but also look at your on-chain credit record.

This is also useful for the developers of application projects. Blockchain application development teams prefer anonymity, but this raises concerns for users using encrypted assets in applications, as some bad projects may run away and tarnish the industry's reputation. If there were an on-chain credit evaluation system, project developers wouldn't need to disclose their names; they could simply show their on-chain behavior records, and developers with no records would be put on alert.

The work of quantifying, analyzing, and labeling on-chain behavior is mainly applied to tracking bad behavior, while some independent developers are also exploring the labeling or even credentialing of good behavior, applying it to credit scenarios and potentially other future scenarios that may require credit display.

Some projects guide users to participate in activities or behaviors required by certain DApp partners and issue on-chain certifications for them. For example, POAP is an application that issues "attendance certificates," providing NFT proof to those who participate in certain DApp virtual activities or offline events, proving their attendance. Users can utilize these NFT certificates in their wallets to create a collection of badges displaying their participation in activities, showcasing their activity level.

Another representative application, Project Galaxy (GAL), is an open credential data network that labels each address by issuing credentials, thus achieving user profiling and helping Web3.0 developers or project operators use credential data to build better products and communities. Once a user's wallet links to Project Galaxy, a "Galaxy ID" is generated, which automatically attaches "certificates" based on the address's historical behavior, such as "Aave borrower," "OpenSea trader," "BAYC holder," etc.

In addition, the following applications are exploring on-chain identity labels.

• On-chain behavior resume RabbitHole

RabbitHole is translated as "rabbit hole." It rewards users for their on-chain behavior performance while learning to use Web3 applications. Users can acquire skills and obtain relevant certificates by learning about NFTs, DeFi, DAOs, etc., on the platform. Unlocking or completing on-chain tasks released by the platform provides opportunities to earn Token and NFT rewards.

Mirror tasks released by RabbitHole

RabbitHole breaks down each decentralized application interaction into game tasks, guiding users to interact with blockchain protocols and decentralized applications, increasing public understanding of the main functions of decentralized applications and cultivating users' DApp usage habits.

For instance, RabbitHole released a task for creating on the decentralized writing platform Mirror, where users publish an article on Mirror and mint it as an NFT. Upon completion, the wallet address will receive a non-transferable NFT certificate (SBT).

These SBTs constitute the "certification" of users' interactions with DApps. With these SBT rewards, users can build their on-chain behavior resumes on RabbitHole.

• On-chain behavior credentialing tool Noox

Noox is an application on Ethereum aimed at building a decentralized on-chain behavior achievement proof platform, allowing users to publish, prove, and mint on-chain behavior achievements in a permissionless manner. Through this platform, users can discover on-chain behavior interaction achievements curated by the community and mint them as non-transferable NFTs, also known as "badges."

The Noox community can help DApp applications plan contextualized on-chain activities, hoping to establish an open community for tracking on-chain behavior, allowing developers to program task rules into the minted badge standards (such as transaction amount, transaction frequency, interaction behavior type, interaction time, etc.), supporting users to mint their on-chain interaction behavior into badge NFTs after completing tasks.

Noox Badge

In Noox, the minting basis for users' SBT badges is the data from wallet address interactions with DApps. Noox believes that the wallet address is key to creating a digital identity for users in Web3, and the SBT badges owned by users serve as unique identifiers to showcase their attributes, interests, and achievements in the Web3 world, unlocking new opportunities as their on-chain identity. Applications and protocols can integrate badges locally and promote open innovation.

Noox Badge is a programmable on-chain achievement non-transferable NFT in the application, visualizing what users have "done" on the blockchain using plain text and graphics, such as trading on OpenSea, providing liquidity for Uniswap, donating on Gitcoin, registering an ENS domain; as long as the underlying data is recorded on-chain, this NFT can represent on-chain actions.

Is there a credit system in the real world? What about Web3.0?

In addition to using credentials to measure users' on-chain behavior applications, developers are also exploring scoring users' on-chain behavior to form a quantifiable, long-term evaluation mechanism for user credit.

Similar to the "Sesame Credit Score" in the Web2 world, the on-chain behavior scoring system continuously updates and evaluates an address's reputation based on users' on-chain and off-chain behaviors (such as transaction history, lending data, etc.) or multiple associated addresses. This simulates how on-chain identity reputation operates in the real world, with the difference being that the on-chain data can not only display results but also verify the basis for obtaining credit.

The on-chain behavior scoring system is based on users' transaction data, snapshot voting data, DAO contributions, and other indicators, automatically generated by an algorithm model. For example, scores for the duration of holding crypto assets, lending credit scores, NFT holdings, etc.

DegenScore is a platform that scores users based on their behavior and experience in the Ethereum ecosystem, quantifying users' on-chain reputation value with scores. It applies the same scoring criteria to each address (for example, an address with a nonce greater than 500 on Ethereum can earn 65 points).

The following applications also explore on-chain credit evaluation systems through scoring:

• On-chain credit scoring application Spectral

Spectral is an open, programmable, and composable on-chain reputation scoring system that allows users to obtain on-chain credit scores based on their interaction activities. It also supports integration with any decentralized application. This application aims to establish a Web3 user identity credit system using on-chain transaction history and then assist in the efficient utilization of on-chain capital through credit risk analysis.

MACRO (Multi-Asset Credit Risk Oracle) is the first on-chain credit scoring tool launched by Spectral, similar to credit scoring applications in traditional financial markets (such as Sesame Credit Score), but it is generated from on-chain transactions and is controlled by users.

Users obtain MACRO credit scores by linking their wallets, which represent their credit status in decentralized finance (DeFi) applications. The score is generated based on users' historical transaction data in various DApps, such as on-chain lending and repayment history, liquidation history, amounts owed and repaid, positions providing liquidity assets, DeFi trading history, and on-chain transaction activities.

Behind MACRO is a machine learning algorithm model created based on DeFi datasets, which can be updated in real-time according to the development of on-chain applications. Currently, Spectral is integrating on-chain data sources from other applications beyond DeFi, such as NFT applications, and is attempting to expand the scoring system to chains outside of Ethereum.

MACRO credit score

The MACRO score not only supports users in obtaining scores using a single wallet but also allows a user to generate scores using multiple wallet addresses' combined historical data. The Spectral application automatically retrieves all DeFi and non-DeFi related transactions associated with one or more wallets, using machine algorithms to generate on-chain credit scores ranging from 300 (indicating very low credit) to a maximum of 850 (indicating very high credit).

Additionally, Spectrum introduces the concept of non-fungible credit NFC, representing users' on-chain transaction history as non-transferable NFTs (ERC721), allowing users to bundle and tie their wallet addresses to a primary address and synchronize their on-chain transaction history to this NFC. When the NFC is connected to the MACRO score, it generates a framework for a programmable credit asset category.

In traditional financial markets, users must obtain credit scores through various banks or credit reporting agencies before applying for loans. Spectral aims to return credit to the users themselves, as every transaction made using an Ethereum wallet is stored on-chain, whether it is lending or payment, with data being publicly transparent and verifiable.

The credit scoring system of Spectral has supported users in obtaining variable interest rate loans based on their scores, marking the first application of Spectral NFC.

On August 24 of this year, Spectral completed a $23 million financing round, led by General Catalyst and Social Capital, with participation from Circle Ventures, Jump Capital, and others. Spectral stated that this round of financing will be used to establish its credit scoring network and gradually scale up. As early as November 2021, the application had already completed a $6.75 million financing round, and to date, it has raised approximately $30 million.

• Lending application ARCx builds "DeFi credit score"

ARCx is a decentralized lending application on the Polygon network. Unlike over-collateralized lending platforms like Aave and Compound, it provides dynamic loan limits based on borrowers' DeFi credit scores, aiming to become a rate platform that utilizes users' on-chain activities.

In DeFi applications, since all user interactions are based on wallet addresses, which are anonymous, current DeFi lending applications provide indiscriminate loans based on full collateral. ARCx attempts to take a different approach—continuously assessing users' on-chain behavior through predefined algorithms. Currently, ARCx mainly consists of two products: the "ARCx Credit" lending application and the "DeFi Passport" on-chain credit scoring system.

On the ARCx platform, users must first undergo a DeFi credit scoring assessment based on their historical on-chain lending activities before using ARCx Credit for borrowing. Through these systems, borrowers using ARCx Credit will establish their DeFi credit scores, which will then determine their loan collateral rates.

“DeFi Passport” DeFi credit score

The "DeFi Passport" is the on-chain credit assessment system established by ARCx, incentivizing users to build reputations in DeFi, thus giving on-chain credit its due value. Each DeFi Passport holder's credit score quantifies their reputation at their on-chain address, and the credit score is assessed by analyzing the holder's historical activities on their Ethereum address, ranging from 0 to 999 points. This credit score determines the collateral rate that lending applications can offer users.