The Teller blockchain project announced on July 16, 2020, that it had raised $2 million via a seed-funding round that was led by Framework Ventures. The startup will use the funds to build a credit score system powered by the blockchain for the Decentralized Finance sector. Its goal is to bridge the gap between the DeFi industry and the traditional finance sector. To do so, the project will aggregate data from the legacy credit score industry into the DeFi lending sector.
The Growing DeFi Sector
The DeFi sector has been experiencing a boom in the recent past. DeFi applications have managed to bank over $2 billion in crypto to date. Around $1.2 billion of this is in the overcollateralized lending sector. Apps like Compound, Aave, and MarketDAO use and interest rate growth strategy known as yield farming, which has helped to popularize overcollateralized lending systems. However, these systems have little to no appeal to audiences looking for real-world lending solutions.
According to Ryan Berkun, the CEO of Teller, Yield farming allows many DeFi protocols to bootstrap liquidity and generate interest among crypto traders. He added the true success of the DeFi sector would only be through achieving interest in the mainstream finance sector. As a result, he believes players in the DeFi sector are currently working in a vacuum.
The CEO believes that unsecured loans are hard to design in a trustless environment. However, they were needed for the DeFi sector to evolve. He noted that existing proposed models would only dilute risk instead of creating real-world user accountability.
Michael Anderson, the cofounder of Framework Ventures, also commented on the issue. He said it was important to develop solutions that offer seamless transitions between the mainstream financial sector and the DeFi sector. According to him, credit scores were an integral part of the lending sector. Consequently, interoperability with the mainstream financial would allow the DeFi sector to phase out centralized credit score systems instead of making a sudden leap into trustless lending.
The Current DeFi Sector and the Teller Solution
As it stands, most DeFi applications rely wholly on collateralization ratios of 150% to 300% for risk-management. In a sector without credit checks on identity, overcollateralization is the only viable option for protecting lenders from loan defaults and asset volatility.
Teller aims to reduce the risk faced by crypto holders and make it easier to enter the DeFi lending market. Eventually, the goal is to lower the barrier for mainstream consumers that accounted for over $140 billion in personal loans in the US.
Teller will operate as a middleware protocol for the DeFi sector that will enable the development of interoperable lending markets that can utilize data from the centralized finance world. To do this, Teller has developed a cloud-based infrastructure that comprises of a distributed node network. Teller will leverage the network where select nodes will perform cloud operations to aggregate a person’s financial data. They will then use the protocol’s credit risk algorithms to given them a credit score and create personalized loan terms.
Solutions being developed by Teller and other companies could help to revolutionize the $215 global debt market. Today, the current DeFi loan market has over $2 billion worth of funds. These solutions could help to expand the market by offering true credit risk assessment.