2024/12/01 by Rik Ghosh, Arka Datta, Ghosh, Rik +5
Business, Management and Accounting · Economics, Econometrics and Finance · #Banking stability, regulation, efficiency #FOS: Economics and business #FinTech, Crowdfunding, Digital Finance #Financial Distress and Bankruptcy Prediction #Risk Management (q-fin.RM)
paper · pdf · doi:10.48550/arxiv.2412.00710
openalex publication_date 2024/12/01 · openalex created_date 2024/12/05 · openalex updated_date 2026/07/28
Decentralized Finance (DeFi), a financial ecosystem without centralized controlling organization, has introduced a new paradigm for lending and borrowing. However, its capital efficiency remains constrained by the inability to effectively assess the risk associated with each user/wallet. This paper introduces the 'On-Chain Credit Risk Score (OCCR Score) in DeFi', a probabilistic measure designed to quantify the credit risk associated with a wallet. By analyzing historical real-time on-chain activity as well as predictive scenarios, the OCCR Score may enable DeFi lending protocols to dynamically adjust Loan-to-Value (LTV) ratios and Liquidation Thresholds (LT) based on the risk profile of a wallet. Unlike existing wallet risk scoring models, which rely on heuristic-based evaluations, the OCCR Score offers a more objective and probabilistic approach, aligning closer to traditional credit risk assessment methodologies. This framework can further enhance DeFi's capital efficiency by incentivizing responsible borrowing behavior and optimizing risk-adjusted returns for lenders.