What Is Blockchain-Based Credit Scoring?

What Is Blockchain-Based Credit Scoring?

In personal finance, the credit score is king. This three-digit number, based on one’s credit history, dictates whether a prospective borrower can secure a car loan or mortgage and may even affect one’s chances of landing a job. Traditionally, scores have been the purview of the Big Three reporting bureaus: Equifax, Experian, and TransUnion. However, as the 2017 Equifax hack demonstrated, there are limitations to this model. Thanks to blockchain-based credit scoring, there is now a better way.

What Is Blockchain-Based Credit Scoring?

The Equifax hack was possible because the bureau housed its information on servers. In other words, there was a central point for hackers to attack. In contrast, blockchains have a decentralized nature, which prevents outsiders from accessing or manipulating data without first commandeering the entire network. As such, blockchain offers greater security than servers.

Colendi is a credit scoring protocol that leverages blockchain to interface with hundreds of distributed nodes. These nodes provide consumer information, each piece of which is evaluated in isolation. In other words, while Equifax stores data on servers, the Colendi protocol gets the facts that it needs, computes, and then moves on.

Security is not the only problem that blockchain-based credit scoring solves. It can also generate scores for the unbanked, or folks who lack access to legacy financial services. The Big Three exclude these people, by relying heavily on repayment history. Colendi’s distributed architecture enables it to consider non-traditional factors as well. These include shopping habits, telecom bills, and social media activity. As a result, blockchain-based credit scoring makes for a more inclusive system that creates and continuously updates a holistic image of each consumer, regardless of whether he or she has an auto loan, credit cards, or a mortgage.

A Brighter Future for the Unbanked

These days, good credit is fundamental. Yet, the current regime fails everybody. It seems that the Big Three are careless with sensitive data and calculate scores according to narrow criteria that ignore an incredible amount of relevant information.

Fortunately, help is on the way. Colendi and other blockchain-based credit scoring protocols have leveraged decentralization to resolve the security issues that led to the Equifax hack and may soon welcome the unbanked to the world of finance.