Spectral Finance, a protocol for programmable creditworthiness, secures $6.75 million funding led by Polychain Capital alongwith additional participation from Mike Novogratz’s Galaxy Digital, Chamath Palihapitiya’s Social Capital, ParaFi Capital, Edge & Node Ventures (The Graph) and MetaPurse Ventures.
What Spectral Finance Does?
Spectral Finance develops infrastructure for assessing credit risk in Web3 and lays the framework for a new asset class of programmable creditworthiness. Spectral’s first product is an on-chain credit score, which gives lenders an improved mechanism to evaluate borrower risk, and grants the user full control over their identity and pseudonymity on the blockchain.
Credit Risk Assessment Is A Big Challenge For Lenders
A credit risk is risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased collection costs. The loss may be complete or partial.
The exhisting credit rating system is centralized and highly inefficient. Moreover, it also requires lenders to share confidential customer data with third parties. The inefficiencies of current credit risk mechanisms were made apparent by shocks like the Global Financial Crisis and the Covid-19 pandemic.
Credit Risk in Web 3.0
Web 3.0 has been envisioned as the decentralized internet for the future: backed by open source applications, absence of a central body to regulate online activity, and being inherently trustless, i.e., all participants make financial transactions without requiring a central trustworthy third party.
DeFi borrowings are inherently a lot more fluid than the traditional finance borrowings — multiple loans may be made with no fixed repayment schedule, all of which can then be repaid at once or through multiple repayments of varying amounts over an extended period. To compensate for the lack of KYC information and effective credit risk mechanisms, DeFi borrowings currently are heavily collateralized (up to 150 percent in some instances), a situation that is arguably highly capital-inefficient, favoring the affluent over the marginalized population.
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There have, however, been minimal efforts to date to assess an entity’s credit risk using data that is both decentralized and anonymous. There is a wealth of information relating to a user’s on-chain activity that can only grow over time, to reflect an aspirant borrower’s risk appetite and the inherent credit risk.
Spectral Finance is building a decentralized credit risk infrastructure based on a user’s on-chain activity and behavior.
Some of the on-chain data points that can be used for credit risk assessment include:
- Number and volume of the following transaction types, including various time-based related metrics
- Borrowing
- Repayment
- Deposit/Lending
- Redemptions
- Liquidations
- Credit mix — diversity of interactions with various DeFi protocols
- Wallet transactions, including wallet balance
- Account health-related indicators, e.g., the amount borrowed as a proportion of the available collateral
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Leading Crypto Investors And Builders Supports Spectral
Spectral is supported by a leading group of crypto-focused angel investors and builders, including Mariano Conti (The former head of smart-contracts at MakerDAO), Stani Kulechov (Aave), Andre Cronje (Yearn Finance), Richard Ma (Quantstamp), Diogo Monica (Anchorage), Andy Bromberg (Eco and CoinList), Kain Warwick & Jordan Momtazi (Synthetix), DeFi Alliance, Rarestone Capital, New Form Capital, Maven11, OP Crypto, Folius Ventures and several others.
Sishir Varghese, co-founder and CEO of Spectral, said:
“Building the infrastructure for programmable creditworthiness lays the groundwork for completely new tooling as we begin to move towards an ecosystem that designs custom and community-centric credit applications.”
Spectral’s on-chain credit risk assessment innovates beyond the traditional off-chain tools like the FICO score. As a fully programmable and composable financial primitive, Spectral’s credit score (MACRO score) enables permissionless execution of existing financial applications such as credit delegation and securitized debt, and lays the foundation for innovative new implementations that leverage on-chain transaction history to build user creditworthiness.
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Andy Artz, Partner at Social Capital, commented:
“Spectral is an innovator that’s leveraging blockchain technology to transform the way credit scores are calculated. We believe the company is a true game-changer for creditworthiness and look forward to propelling them forward on what we deem to be an exciting growth trajectory.”