Blockchain for Identity and Lending
Table of Contents
Overview
This research explores the intersection of blockchain technology with digital identity systems and decentralized lending protocols. Traditional lending relies on centralized credit bureaus and identity verification systems that exclude billions of people from financial services. Blockchain-based identity (self-sovereign identity) combined with decentralized finance (DeFi) lending protocols offers potential for more inclusive credit systems while maintaining necessary KYC/AML compliance.
Background
Traditional Identity and Credit Systems
Centralized credit bureaus (Equifax, Experian, TransUnion in the US) maintain credit histories used by lenders to assess risk. These systems face several challenges:
- Data breaches: 2017 Equifax breach exposed 147 million records
- Limited coverage: Credit-invisible populations cannot access loans
- Geographic fragmentation: Credit history does not travel across borders
- Single points of failure: Centralized databases create systemic risk
- Privacy concerns: Individuals have limited control over their data
The Unbanked Problem
World Bank estimates 1.4 billion adults remain unbanked globally. Many more are "credit invisible"—lacking sufficient credit history to qualify for traditional loans. This excludes them from:
- Mortgage lending
- Small business financing
- Consumer credit
- Insurance products
Blockchain as Trust Infrastructure
Blockchain enables new approaches to identity and lending:
- Immutable credential storage
- User-controlled data sharing
- Transparent lending protocols
- Collateralized lending without credit checks
- Reputation systems based on on-chain activity
Key Concepts
Self-Sovereign Identity (SSI)
SSI places individuals in control of their digital identity. Key components:
- Decentralized Identifiers (DIDs): W3C standard for verifiable identifiers
- Verifiable Credentials (VCs): Cryptographically signed attestations
- Identity wallets: User-controlled storage for credentials
- Zero-knowledge proofs: Prove attributes without revealing underlying data
Example: Prove you are over 18 without revealing your birthdate or full ID.
DeFi Lending Protocols
Decentralized lending protocols enable peer-to-pool lending without intermediaries:
Over-Collateralized Lending
- Aave: Flash loans, variable/stable rates, multi-chain
- Compound: Algorithmic interest rates, cToken model
- MakerDAO: DAI stablecoin minting against collateral
These protocols require collateral exceeding loan value (typically 150%+), limiting their utility for credit-constrained borrowers.
Under-Collateralized and Identity-Based Lending
- Goldfinch: Real-world asset lending with trust scoring
- TrueFi: Unsecured lending to verified borrowers
- Maple Finance: Institutional lending pools
- Centrifuge: Real-world asset tokenization for lending
Sybil Resistance and Reputation
On-chain identity requires preventing Sybil attacks (one person creating multiple fake identities). Approaches include:
- Proof of Humanity: Video verification with vouching
- BrightID: Social graph analysis
- Gitcoin Passport: Aggregated identity stamps
- Worldcoin: Biometric (iris) verification
Credit Scoring On-Chain
Projects building on-chain credit scores:
- Spectral Finance: MACRO score from wallet history
- Cred Protocol: Cross-chain credit assessment
- ARCx: DeFi credit score (Sapphire)
- Masa Finance: Soulbound credit reports
Implementation
Identity Layer Architecture
+-------------------+
| User Identity |
| Wallet |
+-------------------+
|
v
+-------------------+ +-------------------+
| DID Registry |<--->| Credential Issuers|
| (Blockchain) | | (KYC providers, |
| | | governments, |
| | | employers) |
+-------------------+ +-------------------+
|
v
+-------------------+
| Lending Protocol |
| - Verify creds |
| - Assess risk |
| - Issue loan |
+-------------------+
KYC/AML Integration
Compliant DeFi lending requires identity verification:
- User completes KYC with accredited verifier
- Verifier issues credential to user's wallet
- User presents credential to lending protocol
- Protocol verifies signature without accessing raw KYC data
- Loan proceeds with verified identity but privacy preserved
Smart Contract Lending Flow
// Simplified identity-verified lending
interface ICredentialVerifier {
function verifyCredential(
address borrower,
bytes calldata credential
) external view returns (bool);
}
contract IdentityLending {
ICredentialVerifier public verifier;
function borrow(
uint256 amount,
bytes calldata kycCredential
) external {
require(
verifier.verifyCredential(msg.sender, kycCredential),
"KYC verification failed"
);
// Proceed with under-collateralized loan
// based on verified identity and on-chain history
}
}
Risk Considerations
- Smart contract risk: Protocol bugs can lose funds
- Oracle risk: Price feeds can be manipulated
- Regulatory risk: Unclear treatment of DeFi lending
- Default risk: Under-collateralized loans have higher default rates
- Privacy vs compliance: Balancing user privacy with AML requirements
References
- W3C DID Specification: https://www.w3.org/TR/did-core/
- W3C Verifiable Credentials: https://www.w3.org/TR/vc-data-model/
- Aave: https://aave.com/
- Compound: https://compound.finance/
- MakerDAO: https://makerdao.com/
- Goldfinch: https://goldfinch.finance/
- Proof of Humanity: https://proofofhumanity.id/
Notes
- The 2016 timeframe of this research predates the DeFi summer of 2020 and subsequent explosion of lending protocols.
- Self-sovereign identity standards (DIDs, VCs) have matured significantly since initial research.
- Regulatory frameworks like MiCA (EU) and proposed US legislation are beginning to address DeFi lending compliance requirements.
- The fundamental insight—that blockchain can enable identity-based lending with privacy preservation—remains a active area of development in 2024 and beyond.