Want to understand what Creditcoin is and why we need it? Then look no further. This blog has an explanation for every level of expertise.
We believe in the power of Creditcoin to change finance for the better. But to make sure that happens, we know we need to get across the message of what Creditcoin is and what it does to the wider world as effectively as possible. So, whether you’re yet to get to grips with crypto, or you’re a long time participant and advocate, read on to find an explanation tailored to suit you.
Creditcoin matches and records loans on a public network, acting as an open, transparent and decentralized credit bureau for investors, borrowers and lenders looking to raise and invest funds in emerging markets.
For those of you that have already dipped your toes into the crypto waters, this is a summary of Credicoin’s rudimentary premis and functionality.
At its most basic level, Creditcoin helps people and companies lend money to other people and companies in the developing world that lack access to traditional financial services. To do that, it uses a technology known as blockchain. The blockchain helps match borrowers to lenders based on the loan terms they’re after and stores and encrypts the associated loan transaction data. Once this credit data is added to the blockchain, it can’t be changed. Ever. It’s also accessible to anyone.
This level of transparency enables easy financial auditing, allowing would-be lenders to effectively assess risk. Think something like Equifax or Experian, but decentralized, immutable and without a monopoly on who controls the credit information. This level of code-enforced transparency means people can lend and invest their crypto with confidence, helping Creditcoin reach its goal of bringing financial services to the 1.7 billion underbanked and unbanked people in emerging markets.
It’s simple really, making credit information and infrastructure open to all makes credit markets more efficient and contestable. You can read more about why blockchain is useful for this here.
For the more seasoned hodlers out there, this explanation is for you...
What’s the problem?
There are alarming disparities in access to financial services across the globe. Whilst we often take things such as bank accounts, cheap payments and most importantly, credit, for granted, these vital services are inaccessible for over 1.4 billion people worldwide.
Whilst crypto is already solving some of these problems, through stablecoins, low-cost payments, remittances, and more, the biggest financial obstacle to growth in emerging markets remains credit.
For example, SMEs in Africa cite limited access to financing as the single biggest constraint on their growth, higher than water, corruption, and even electricity in many cases. This financing gap for emerging market MSMEs is now as large as $5 trillion dollars. For these markets to reach their full potential, a better structure to raise and distribute credit is required.
Why does the problem exist?
The global credit market has 3 different users:
- End-borrowers — In this case the financial excluded, but more generally anyone who needs loans for their daily lives or to grow their businesses.
- Lending intermediaries — These are the banks, microfinance providers and fintechs assessing risk and deploying loans.
- Investors — Any party seeking to provide lending capital in return for interest. Traditionally this has been the sole remit of banks, funds and accredited investors, but thanks to OpenFi, now also includes people like you and me.
Now, you’ve probably heard about DeFi and might be wondering if that could help? DeFi cuts out the trusted intermediaries and replaces them with protocols. Unfortunately, DeFi’s current lending model is also fundamentally incompatible with the vast majority of real-world lending applications. DeFi requires over-collateralization to work. Not very helpful if you’re a small business in Africa with no liquid, let alone on-chain, capital to spare.
In the real-world, where some degree of under collateralization is inevitable, the system relies on some degree of counterparty trust. Or in other words, the expectation of repayment, rather than a guarantee.
This is of course where the problem arises. In emerging markets where concrete financial records are often thin, untrustworthy, or simply inaccessible, how can lending intermediaries trust borrowers to pay back? And by extension, how can investors trust lending intermediaries to generate them a return? Without access to good information, adverse selection increases, counterparty trust decreases, and the risks and costs of borrowing and lending go up.
The solution is simply better information. That’s where Creditcoin comes into things.
How does Creditcoin help?
Creditcoin is an interoperable blockchain-agnostic lending protocol, designed to match and record cryptocurrency bullet-loan transactions. Built on Substrate, Creditcoin acts as a public credit bureau built on a public PoW blockchain.
OpenFi partners such as Aella or Jenfi, integrate with Creditcoin via the Credal API to record their credit performance, and the credit history of their users, on Creditcoin for the purposes of transparent financial auditing. To record on the blockchain, users must pay a fee in CTC. Blockchain is a perfect platform for valuable credit data, given that it is openly accessible, transparent, and most importantly, immutable.
Unlike DeFi, that means we don’t completely remove intermediaries from the process, but rather improve trust and risk minimization through better information. This is actually a better system. Modern technology is rapidly improving the ways in which fintechs and other microfinance institutions can assess risk and deploy capital. In particular, mobile phone data can be used for predictive risk modeling using machine learning, whilst many OpenFi partners also have unique repayment models to limit downside risk.
Untapped Global uses capital-financing rather than bullet-loans, providing smart assets such as e-bikes to local operators, for example. If these businesses start falling behind, Untapped simply reclaim the assets themselves. Other fintechs are integrating directly with payroll providers, ensuring they are well-positioned to claim any payday loan interest back.
These lending intermediaries’ biggest constraint isn’t actually assessing risk well enough to generate consistent returns, it’s raising enough capital to grow and meet demand. In other words, the problem is actually connecting capital to fintechs at the right price, not just assessing the risk of end-borrowers.
By building a transparent credit history on Creditcoin, market participants have a clear view of lender and borrower performance, and in turn, this improves the flow of capital into emerging markets.
For example, Aella, one of our major OpenFi partners, recorded over $8.8M in loans since integrating with Creditcoin. That data is all visible on the Creditcoin Block Explorer. We also have a major update coming to make that data even more interactive. On the other side, you can also invest in companies like Aella, Jenfi and Untapped directly through our OpenFi investment platform Gluwa Invest.
But long-term, open data sharing platforms have a variety of other benefits too. Creditcoin is open to anyone, meaning that unlike the monopolistic networks of today such as Facebook or Google, anyone can come in and use the data on Creditcoin to offer new services, improve their products and contest the global credit market.
Open networks are often the most valuable. The internet was the first open information network, Bitcoin was the first open value network, Ethereum was the first programmable-value network, and Creditcoin is being built as the world’s first open credit network.
Erm, I’m just the copywriter. If you want all the details and technical specifications, including future plans such as on-chain identity and more, head to the Whitepaper here.
Creditcoin is a foundational L1 blockchain designed to match and record credit transactions, creating a public ledger of credit history and loan performance and paving the way for a new generation of interoperable cross-chain credit markets.
By working with technology partners, fintech lenders such as Aella, and other financial institutions across global emerging markets, Creditcoin is securing capital financing, building credit history and facilitating trust for millions of underserved financial customers and businesses based on the principles of Open Finance.