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On-Chain Credit Risk Score in Decentralized Finance

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Listed:
  • Rik Ghosh

    (Chainrisk)

  • Arka Datta

    (Chainrisk)

  • Vidhi Aggarwal

    (Chainrisk)

  • Sudipan Sinha

    (Chainrisk)

  • Rajdeep Sengupta

    (Chainrisk)

Abstract

Decentralized Finance (DeFi), a financial ecosystem without centralized controlling organization, has introduced a new paradigm for lending and borrowing. However, its capital efficiency remains constrained by the inability to effectively assess the risk associated with each user/wallet. This paper introduces the 'On-Chain Credit Risk Score (OCCR Score) in DeFi', a probabilistic measure designed to quantify the credit risk associated with a wallet. By analyzing historical real-time on-chain activity as well as predictive scenarios, the OCCR Score may enable DeFi lending protocols to dynamically adjust Loan-to-Value (LTV) ratios and Liquidation Thresholds (LT) based on the risk profile of a wallet. Unlike existing wallet risk scoring models, which rely on heuristic-based evaluations, the OCCR Score offers a more objective and probabilistic approach, aligning closer to traditional credit risk assessment methodologies. This framework can further enhance DeFi's capital efficiency by incentivizing responsible borrowing behavior and optimizing risk-adjusted returns for lenders.

Suggested Citation

  • Rik Ghosh & Arka Datta & Vidhi Aggarwal & Sudipan Sinha & Rajdeep Sengupta, 2024. "On-Chain Credit Risk Score in Decentralized Finance," Papers 2412.00710, arXiv.org, revised Mar 2025.
    • Handle: RePEc:arx:papers:2412.00710
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    File URL: http://arxiv.org/pdf/2412.00710
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