Can Onchain Analysis and POAPs Bring Unsecured Credit Lines to Defi?
What are we doing? 🤔
This is the disclaimer section today.
My last post on pfps was well received and resulted in a lot of inbound. Many NFT projects wanted me to take a look at their work, do analysis, share my thoughts, etc.
If you haven’t read that post yet, here it is:
One of the most interesting messages I received, however, was from the founder of the Proof Of Attendance Protocol (POAP).
@worthalter reached out and asked if I would take a look at POAP and if I could find a way to share some information about the project, he and I discussed a potential payment for doing some research and sharing my thoughts — hence this is the disclaimer.
I’ve received some POAPs for attending PieDAO governance calls in the past, but I have not take a deep look at the product.
We never settled on a payment or a scope of work but I am writing this anyway because I need to get my thoughts out and I am hopeful that engagement with this piece can lead to a further partnership.
But this disclaimer goes a bit further than the general financial interest bit. I want to share a bit about how I dive into new ideas and how I go down a rabbit hole when I find one.
I like distilling information about the crypto ecosystem and I try to present it so that there is value to newcomers and veterans.
By sharing this information, I hope that some of you will reach out to me and share your thoughts on POAPs, crypto, unsecured lending, etc.
You hear about build in public, learn in public, etc. This is that.
I had a couple thoughts about POAP over the past few days and the one that is most interesting to me was a path that @worthalter pointed out to me, unsecured lending.
There are a couple of other Unattended Thoughts at the bottom. We may dive deeper into those in the future.
This post is ROUGH. I am likely trying to cover too much — but I am going to give it a shot anyway.
As always, I may make mistakes or misrepresent information. This is never the intention but always a risk. If you take issue with anything presented please reach out on Twitter and help me continue to learn. If you find grammar issues, I would also appreciate those being pointed out. I don’t need a proxy to edit this post.
Now that we’re past that… let’s jump in!
The Pseudonymous Economy
Do you know who that is?
That is Scoopy Trooples, one of the co-founders of Alchemix, a lending protocol that we will dive into in a bit.
Do you know who that is?
That is 0xMaki, one of the co-founder of Sushi, a marketplace and lender.
If you’re a newcomer to the space, numbers generally put these protocols into perspective.
As of now Alchemix has nearly $300m locked in its protocol as collateral for lending activities. Check out this awesome Dune Analytics dashboard. The governance token (for newcomers think of this as a stock, sorry veterans) has a market cap of nearly $150m.
Sushiswap, Sushi’s marketplace product, has seen over $92b in volume. Check out this awesome Dune Analytics dashboard. Sushi, the governance token market cap peaked on March 13th at ~$2.9b.
These are non-trivial numbers — and we don’t know the legal identities of Scoopy or Maki. These are pseudonymous contributors to the ecosystem and their reputation is tied to these pseudonyms.
I want to reiterate that these are two projects that have seen either hundreds of millions or billions of dollars flow through them without the users knowing the legal identities of the founders and proprietors.
If that sounds crazy…
Risks and Realities of the Pseudonymous Economy
While we trust Scoopy and Maki, that does not mean that all pseudonymous community members should be trusted.
There are bad actors in every network and trust must be earned or lost.
Some actors build that trust over time by using a consistent account and producing good products that work as intended without nefarious intent.
Some actors flit between account or act maliciously and are known bad actors. Well known accounts (to the community) are able to build up this reputation — whether good or bad.
But most actors in the space are not well enough known to earn trust.
Current State of Lending
Loans in decentralized finance at this point are over collateralized. That means that a prospective borrower must bring collateral that is worth more than the line they wish to borrow on.
Two of the most well known protocols in the space are Compound and Aave.
These protocols allow lenders to deposit funds and earn a yield. Lenders may then borrow against their deposits. It seems strange, but without traditional credit checks it is difficult to assess the trustworthiness of a borrower. In this way, most lending and borrowing protocols resemble extremely high tech pawn shops.
In the case of Aave and Compound, volatile assets can be used as collateral for loans. The collateral and loan may be denominated in different forms and therefore there is a risk of liquidation.
Alchemix, the project co-founded by Scoopy Trooples (what a name lol), uses a different mechanism to enable borrowing. Depositers are only able to borrower in the same form as the asset they deposited — the assets on Alchemix are limited.
Someone who deposits 2,000 DAI may borrow 1,000 DAI. As the loan is denominated in the same form as the collateral, there is no risk for liquidation!
But why would someone deposit 2,000 to borrower 1,000…?
There are two main reasons that come to mind:
Borrowing and selling assets have different tax implications.
Alchemix loans are self-repaying. Yes, you read that right. We’re not going to go into the inner-workings Alchemix in this post but there is some great information here about use cases and functionality.
Without going in-depth, I need to ask you to accept it and move on.
Spectral Finance and the MACRO Score
Spectral proposes using onchain analysis to determine the creditworthiness of a borrower. Based on the actions of a wallet or a bundle of wallets, activities can be analyzed and creditworthiness can be approached.
Has this wallet taken on debt in the past?
Has this wallet been liquidated in the past?
Has this wallet repaid its debts?
Based on these past financial transactions, Spectral will determine creditworthiness and make a determination around the size of your credit line and your interest rate in case of failure to pay.
Onchain Analysis
It’s not new to anyone who follows my work that I am a big fan of Dune Analytics. Getting comfortable with Dune and Etherscan feels like having superpowers.
I have been able to track individuals down based on their online presence and known wallet contents. Once you can link a wallet with a known entity you can start to better understand their motivations and actions.
While I am just getting started with my onchain analysis journey, there are firms such as Chainalysis that perform these types of services for institutions and protocols to give insight and identify potentially malicious actors.
Onchain analysis tells the financial story. But how do you build a comprehensive view of the individual beyond their financial history?
When the company I work at now went through the accelerator, there was another company that was trying to create credit scores for individuals who lacked a financial history. One of the main target user bases was foreign students at American universities.
They used heuristics such as club membership and engagement as well as grades to help these students access credit lines despite lack of FICO scores.
Proof Of Attendance Protocol
Before we do the POAP overview: It’s Poh-ap. It’s not the Pope.
POAPs are the bookmarks of your life.
POAP enables a new way of keeping long-lasting records of life experiences.
A POAP is a digital collectible created as a NFT (non-fungible token)
powered by the blockchain.
Individuals receive POAPs to signify their attendance to an event or the participation in an activity.
POAPs are ERC721s, but the power comes in the association and the ecosystem that exists around them.
POAP has an entire ecosystem and we could likely write entire posts about each of these…
poap.xyz
Homepage. Lets you navigate around the ecosystem, has links to FAQ, community resources such as Discord, and to GitHub.
poap.chat
POAP based private channel access. Think of this like using Collab.Land to access to private channels in pfp Discords.
poap.delivery
Claim POAPs that you are eligible for!
poap.vote
This used to enable snapshot style voting for anyone who holds a requisite POAP. Interestingly, poap.vote predates Snapshot!
poap.fun
Create raffles for POAP holders. Imagine that the LA Lakers issue POAPs to attendees of a game against the Boston Celtics and let the attendees participate in a raffle for a signed LeBron jersey — fun!
poap.gallery
Browse POAP and their holders. There are some absolutely beautiful POAPs. I particulary like this SuperRare one
poap.app
View your POAPs here! Share your best ones in this thread!
poap.art
Coming soon… 👀
It’s a big ecosystem.
The POAP team recognizes that a number of these features are experimental. I am excited to see how this continues to evolve and come together into a cohesive experience.
The Alchemix POAP
In early June 2021, Alchemix self-rugged. It’s kind of funny, but it must have been terrifying for Scoopy and the team.
As Alchemix launched alETH and allowed users to submit ETH as collateral for loans a major bug was discovered. Users were able to deposit ETH, take a loan in the form of alETH and then remove their collateral.
Over $6.5m was exploited. You can read more:
Once Alchemix realized what had happened, they started to ask the community to return the exploited funds.
The community came through. Funds (well, not all of them) have been returned and those wallets are now viewed as good actors.
And how did Alchemix reward those returned all exploited funds?
Beyond building an onchain financial transaction history, unsecured credit providers like Spectral Finance will have to take POAPs such as the Alchemix Legend POAP into account. Are you a responsible borrower? Do you do the “right” thing?
What types of event do you go to? Are you engaged in the communities you say you belong to?
POAPs are untapped and I will continue to try to claim them as I participate in the communities that I am involved in and care about.
Unattended Thoughts
Every time I go down one of these rabbit holes, I end up seeing a lot of potential directions that I could go. I like to capture these for myself for later exploration or to inspire others to go down one of these paths.
poap.dating
We’ve talked about using POAPs for creditworthiness, what about POAPs in dating profiles?
“What’s your favorite hobby?”
“You’ve never been to a broadway show?!”
Citizen Engagement Ratings
Andrew Yang ran for Mayor of New York City and got obliterated. One of the early marks against him was the fact that he had never voted in a prior NYC Mayoral Election. Citizen engagement is important and as POAPs are being issued to voters we can start to build an engagement rating and profile for wallets.
Over time as more votes occur, this will likely become more and more important. Vote! Collect your POAPs!
Multisig POAPs
I see value here. I’ve chatted with Justin Bram about this and we both see a potential future of career multisig signers.
As we have career board members now, there will be a future where being a trusted entity will carry value and proving that involvement will be valuable.
A wallet holding multiple multisig POAPs could signify trustworthiness.
I’ll be diving more into multisig soon!
Fund Ongoing Research
Do you find this information helpful?
Donations & tips are appreciated: 0x581bef12967f06f2ebfcabb7504fa61f0326cd9a
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