Crypto Credit Rating Firm Credmark Pivots to Modeling DeFi Protocol Risks

After years of creating credit reports on the crypto-lending industry, crypto credit data company Credmark is pivoting to risk-scoring decentralized protocols to provide accounting-level data for the decentralized finance (DeFi) space.

After a $5.5 million raise from investors including Solidity Ventures, Genesis Block Ventures, Spark Digital Capital and others, Credmark is partnering with oracle provider API3 to launch a decentralized platform for risk models that will try to score decentralized finance projects, said Momin Ahmad, chief strategy officer at Credmark. As part of the raise, Credmark now counts employees from Coinbase, Moody’s, API3, Bridge Mutual and a former FICO executive among its advisers.

The DeFi pivot

Credmark has spent three years trying to develop a system by which it could assign credit scores to individual crypto users, as well as research and analysis on the crypto lending industry, through its quarterly "Crypto Credit Reports". These reports included analysis of proprietary data from centralized crypto lenders such as BlockFi, Nexo and Celsius, as well as public data from DeFi protocols.

The centralized lenders had accounting teams and detailed spreadsheets, and Ahmad was able to inquire about how much collateral was kept at each lender versus how much collateral was rehypothecated.

“When I went to DeFi I found that level of nuance just does not exist at all,” Ahmad said. “Doing both led us to the conclusion that there were a handful of problems, particularly in DeFi, that needed to be addressed before something like a credit score or even other risk management tools can properly work.”

That kind of information allows centralized lenders to do a portion of their loans as one-to-one collateralized or undercollateralized loans, Ahmad said.

“In order to get to a point where you can do true, peer-to-peer, permissionless, under-collateralized lending, you need to make sure that the data interpretation is a little more robust,” he said.

In the meantime, without better data all DeFi is left with is overcollateralization, Ahmad said. Credmark now aims to make DeFi more friendly for less crypto-savvy retail users by risk scoring DeFi protocols.

“As new users arrive to DeFi, it is fair to assume they will not have the same appetite for risk as the current user,” said Serge Ugarte, former vice president of global business development at FICO and a newly added Credmark adviser. “Providing this new retail user with tools to mitigate downside will be crucial in order to maintain a healthy ecosystem.”

Using data sets and oracles to create risk models

Credmark will combine already-indexed data sources like The Graph and Dune Analytics with blockchain data from Trueblocks, which does heavy computations to rebuild the blockchain at a certain point in time so users can have essentially what would be accounting data from the blockchain, Ahmad said.

The company will also use Nix, an operating system where retail users can see the environment in which that data was recorded. On Nix, users can gain access to Credmark’s data, feed it into its risk model, and verify for themselves that the way in which the model rated a protocol was accurate.

In the future, Credmark plans to create a way for other users to submit their own risk models. When the platform matures, API3 oracles will feed the risk model results data to any smart contract protocol that requires trustless on-chain data.

“Our first tool will create ranges on Uniswap v.3 pools and will invest funds accordingly,” Ahmad said. “The later models might be suggestive or automated.”