Team 10 + DeCredit Score

[sofiverse]

Track Number: 1

Track Name: RWA

Challenge Statement: Right now, micro-businesses in Latam, representing 90% of businesses, need fast micro-loans, but the market is dominated by loan sharks with insanely high interest rates, which are impossible to pay out, leaving them in a vicious cycle.

How can we give access to micro-loans to local businesses in Latam, with affordable interest rates, avoiding loan sharks, while protecting Arbitrum DAO’s investment and providing them a good risk-managed return on investment?

Members: Sofia Villarreal + Anna Kaic

Team Lead contact name or alias: Sofia Villarreal

Pitch:

Team 10 - DeCredit Score - GovHack Brussels

PROPOSAL

Abstract

Right now, micro-businesses (butcheries, corner shops, barbers) in Latam represent 90% of economic units. They need fast micro-loans, but the market is dominated by loan sharks with insanely high interest rates, which are impossible to pay out, leaving them in a vicious cycle.

Challenges in accessing financing, along with bureaucracy, are other obstacles that Latin American micro-businesses must overcome to consolidate their growth. Financial institutions do not facilitate sufficiently the access to loans that micro-businesses need to expand their businesses. On the other hand, in general, the process of creating a company is slow, requiring numerous, complex, and costly procedures that delay starting a business.

DeCredit Score gives local businesses in Latam access to micro-loans, with affordable interest rates, avoiding loan sharks, while protecting investors’ funding and providing them a good risk-managed return on investment.

Motivation

Micro-businesses make up 90% of all economic units in Latin America, and the majority of them depend on micro-loans. The market is dominated by loan sharks, landing micro-credits but at the same time imposing insanely high interest rates (up to 400% a year!). Besides the financial aspect, which creates a strong dependence on micro-loans they can never pay out, there is an alarming underlying security threat for the borrowers and their loved ones. Regular kidnappings or death threats by the hand of loan sharks, followed by a ransom that will be borrowed directly from the same borrowers, creating an infinite loop of debt, are a daily occurrence.

Micro businesses live in a poverty trap and DeFi can drop these interest rates by about 90%. Studies have shown that access to affordable credit allows micro businesses to grow about 54% a year! We could be unlocking the potential of underdeveloped countries with a solution that allows unsecured credits to leverage the power of web3

Rationale

Real-world assets (RWAs) are underrepresented in Arbitrum, comprising only 1.1% of grants in 2023, and tokenized private credit making up just 0.4% of the global market. Arbitrum should develop an actionable strategy, allocate more resources, and take a leading role in RWAs, aligning with its position of being the Home of DeFi.

DeCredit Score has the potential to become a tangible use case that brings an Arbitrum based blockchain solution to the masses, attracting thousands of users through word of mouth from trusted contacts and first-hand experience rather than blockchain insiders. By addressing the problem of loan accessibility for micro-businesses, which represent 90% of Latin America’s economic entities, DeCredit Score and Arbitrum will provide tangible value to DeFi and gain significant public traction.

How Does DeCredit Score Work?

The micro-business owner (user) registers on the app, creating a smart wallet and getting onboarded to Arbitrum. The user, then, undergoes a KYC process that has two parts: in-app validation of business location, identity, and business permits, followed by on-ground validation by DeCredit Score team members with attestations. This process assigns an initial credit score.

Next, users create profiles and can add validations (e.g., email, social media, crypto transactions via Bitso, house ownership (through the Ethereum Attestation Service), and payment history) to boost their credit score. Users then can apply for loans, specifying the amount, weekly payments, and justifications (such as business invoices). DeCredit Score doesn’t require collateral initially; instead, each weekly loan payment builds collateral, mitigating risk if payments stop.

The pilot, with a 200k stablecoin loan pool on ARB, aims to support 100 micro-businesses over six months. Past research* shows micro-businesses often renegotiate loan terms due to vulnerabilities to unexpected events, not lack of commitment. DeCredit Score offers flexible payback terms.

Pilot KPIs include:

• Number of businesses signed up
• Initial and final credit score
• Number of loans paid on time
• Number of renegotiated loans

To prevent gaming the system, the app uses dID to recognize if users try to open multiple accounts, ensuring the same credit score and verification stamps apply, and blocking new loans if previous ones aren’t repaid.

*NOTE: DeCredit Score’s database is sourced from a Mexican financial institution that serves micro-businesses. This proposal iis based on research previously funded by Arbitrum DAO and RnDAO CoLab Fellowship. All the findings from the research can be found here: Unlocking IRL reputation in web3 — Humberto Besso Oberto Huerta 🐙

Specifications

Attestations: Reclaim protocol / Ethereum Attestation Service - https://www.reclaimprotocol.org / https://attest.org/

Smart wallet: Candide wallet - https://www.candidewallet.com/

Stamp-based scoring: Gitcoin Passport - https://passport.gitcoin.co/

Off/On ramping to/from Mexican Pesos: Bitso - https://bitso.com/

Steps to implement

Phase 1 - App Development

• UI and scoring. Attestation schemas, scoring methodology (weights and processes), interfaces for borrowers, and protocol admin.

  • Expected completion time: 3 months
  • Metrics regard the delivery of: Trust scoring attestations: Google Maps; Facebook and Instagram; Holonym.
  • Scoring methodology: Schemas to attestate; Process of attestation; Trust points to each and the way it was calculated.
  • Interfaces: Borrower UI; Protocol admin.
  • Budget: 30k USD in $ARB*
  • Manpower: UI designer, frontend developer, credit researcher

• dID. Smart wallet (account abstraction) interface connected to the scoring backend.

  • Expected completion time: 3 months
  • Metrics regard the delivery of:
  • Smart wallet connected to UI and backend.
  • Translated to Spanish.
  • Loaded with a stablecoin on ARB to pay for the users’ fees.
  • Budget: 12k USD in $ARB*
  • Manpower: blockchain developer and Spanish translator

• Smart contract. Automate the scoring update based on the schemas issued.

  • Expected completion time: 6 months
  • Metrics regard the delivery of:
  • Smart contract definition to identify issuance of scoring schemas relating to a DID identifier.
  • Smart contract development.
  • Smart contract launch in testnet.
  • Budget: 20k USD in $ARB*
  • Manpower: blockchain developer

Phase 2 - Pilot testing

• Onboarding pilot. Interfaces and processes are tested with 100 borrowers and a $200k landing pool from Arbitrum.
• Expected completion time is 6 months
• Metrics regard the delivery of:
  • Methodology of onboarding and testing.
  • Social and environmental impact hypothesis
  • Reach out campaign of pilot borrowers.
  • Selection of pilot participants.
  • Launch pilot.
  • Budget: 80k USD in $ARB (for manpower) + 200k USD in $ARB (for lending pool liquidity)*
  • Manpower: blockchain developer, 10 KYC validators on the ground, blockchain researcher, project manager, 5 customer support agents

Phase 3 - Documenting

• Documenting. Usage is documented as research. A paper is issued with recommendations of actionable steps and documentation of the credits asked, the initial trust score of borrowers, their updated trust score at the end of the pilot, financial behaviour and trends (like time to pay out the loan, changes in payback plan etc.) and the social impact achieved. The report will include improvement actions.
  • Expected completion time is 2 months.
  • Metrics:
  • Number of participants.
  • Credits asked: amount and maturity.
  • Credit score evolution: initial credit score, credit score evolution throughout the credit maturity.
  • Insights from participants regarding user experience, things to build, and improvements.
  • Social impact hypothesis vs achieved.
  • Budget: 8k USD in $ARB*
  • Manpower: blockchain researcher.

*$ARB amount depending on the $ARB price

Timeline

NOTE: In case of a successful application, we are more than happy to accept payouts based on milestone delivery.

Phase 1 - App Development

• Milestone 1: UI and scoring Attestation schemas, scoring methodology (weights and processes), interfaces for borrowers, and protocol admin.

  • Start Due: 1st August 2024
  • Completion dates: 30th October 2024
  • Budget request: 30k USD in $ARB*

• Milestone 2: dID and Smart Wallet (account abstraction) interface connected to the scoring backend.

  • Start Due: 1st September 2024
  • Completion date: 30th November 2024
  • Budget request: 12k USD in $ARB*

• Milestone 3: Smart contract. Automate the scoring update based on the schemas issued.

  • Start Due: 1st September 2024
  • Completion date: 30th November 2024
  • Budget request: 20k USD in $ARB*

Phase 2 - Onboarding pilot

• Milestone 4: Interfaces and processes are tested with 100 borrowers and a $200k landing pool from Arbitrum.
  • Start Due: 1st December 2024
  • Completion dates: 31st May 2025
  • Budget request: 280k USD in $ARB (200k USD in $ARB* lending pool liquidity + 80k USD in $ARB for running the pilot)

Phase 3 - Documenting
- Milestone 5: Research paper showing pilot results, insights and improvement recommendations.
- Start Due: 1st June 2025
- Completion dates: 31st July 2025
- Budget request: 8k USD in $ARB*

Overall Cost
350k USD in $ARB

[milk-cash]

Nice input here @sofiverse ,

How will the team handle defaults and ensure the sustainability of the lending pool?
What’s the long-term plan for scaling beyond the initial 100 micro-businesses?
How will the team navigate the complex regulatory landscape across different countries?
What’s the plan for user education and onboarding, given the potential lack of familiarity with blockchain technology?
How does the credit scoring algorithm compare to traditional methods, and how will it be refined over time?

Overall Assessment:
The DeCredit Score project shows promise in addressing a critical need in Latin America while leveraging blockchain technology. The phased approach and clear milestones are positive indicators. However, the success of the project will heavily depend on execution, especially in terms of risk management and regulatory compliance.

This a high-risk, high-reward investment. The potential for social impact and market disruption is significant, but so are the challenges. I would recommend moving forward with a smaller initial investment, contingent on meeting specific milestones in the pilot phase, with the possibility of further funding based on performance and risk mitigation strategies.

Successful projects tend to have a clear value proposition, a user-friendly interface, robust security measures, and a strong community of developers and users. Failed projects, on the other hand, often struggle with complexity, lack of trust, and insufficient security measures. Additionally, projects that fail to address the specific needs and challenges of their target audience may struggle to gain traction and adoption

1. Here are some suggestions for justifying the budget:

• App Development: Break down the costs for app development further, including the cost of hiring developers, designers, and researchers. This will help the community understand where the funds are being allocated.
• Pilot Testing: Justify the cost of the pilot testing phase by providing more details on the resources required, such as the cost of hiring KYC validators, customer support agents, and a project manager.
• Documentation: Explain why the documentation phase requires 8k USD in $ARB and how this will be used to create a research paper showing pilot results, insights, and improvement recommendations.

Overall, your proposal is well-structured and addresses a significant problem faced by micro-businesses in Latin America. By providing more details on pilot testing, risk management, scalability, and budget justification, you can further strengthen your proposal and increase its chances of success.

[cp0x]

I also like your idea, but I really doubt its implementation.
The main problem: in crypto, money is issued for existing assets, unlike the real world, where there are many institutions that protect banks. Banks and microcredit organizations can issue money without collateral.
And here it is very difficult to compete with them, since ordinary people have nothing that they could give as collateral.

[Husk]

Start small and grow steady
Contact local & global influencers to help your cause
Thank you for the opportunity to further refine our proposal. We have carefully considered your suggestions and made the following improvements to ensure a sustainable, long-term model that benefits all stakeholders while addressing risks and driving growth.

Sustainable Win-Win Model
To create a mutually beneficial arrangement, we propose the following:

Revenue Sharing: A portion of the interest earned from the loans will be shared with the Arbitrum DAO, providing a steady stream of revenue to support the ecosystem.

Staking Incentives: Users who stake ARB tokens will receive a portion of the protocol’s revenue, encouraging long-term commitment and loyalty to the platform.

Referral Program: Implementing a referral system that rewards users for onboarding new borrowers, creating a viral growth loop and increasing adoption.

Interoperability and Composability
To ensure seamless integration with the broader DeFi ecosystem, we will:

Use standard token formats (e.g., ERC-20) for the lending pool and collateral, allowing for easy integration with other protocols.

Collaborate with other DeFi platforms to create bundled products and services, such as insurance, savings accounts, and investment opportunities.

Implement a modular, open-source architecture that allows developers to build upon and extend the functionality of DeCredit Score.

Risk Assessment and Management
To minimize the risk of bad debt and protect the protocol, we will:

Implement a dynamic, multi-factor credit scoring system that considers on-chain and off-chain data, such as repayment history, collateral value, and business performance.

Set conservative loan-to-value ratios and adjust them based on market conditions and borrower risk profiles.

Establish a diversified lending pool with exposure limits to prevent concentration risk.

Create a default insurance fund, capitalized by a portion of the interest payments, to cover potential losses.

Conduct regular stress tests and audits to identify and address vulnerabilities in the system.

Formal Verification and Security
To ensure the safety and reliability of the platform, we will:

Engage reputable third-party auditors to conduct formal verification of our smart contracts and codebase.

Implement secure coding practices, such as using well-tested libraries, performing regular security audits, and adhering to industry standards.

Establish a bug bounty program to incentivize the community to identify and report vulnerabilities.

Provide clear documentation and educational resources to help users understand the risks and benefits of using the platform.

Growth and User Acquisition
To drive long-term growth and attract a wide user base,

Partner with local influencers, media outlets, and community organizations to raise awareness and trust in the platform.

Educate on risk or manage thier loan with a collateral, a tangible collateral.

Offer onboarding incentives, such as reduced interest rates or bonus tokens, for new users.

Continuously gather user feedback and iterate on the product to ensure it meets the evolving needs of micro-businesses.

Expand our offerings to include additional financial services, such as insurance, savings accounts, and financial education.

Math and Budget
Based on our revised model, we have updated the budget as follows:

App Development: 70k USD (increased to account for additional security and interoperability features)
Pilot Testing: 250k USD (150k USD for lending pool, 100k USD for operational costs)
Documentation and Auditing: 30k USD (increased to include formal verification and security audits)
Total Budget: 150k to 350k USD to negociate with the dap in ARB but gradualy with kpi and monetoring

We believe that this revised proposal presents a more sustainable, risk-managed approach to providing microloans to businesses in Latin America while driving growth and adoption for the Arbitrum ecosystem. By prioritizing security, interoperability, and user acquisition, we aim to create a platform that not only empowers micro-businesses but also contributes to the long-term success of the Arbitrum network.

Partner with the exiting ARBITRUM LENDING PROTOCOLs so you will conver the full demographic range @sofiverse in all money market niches.

[Husk]

In 2024, the default rate in Latin America has been trending downwards. Key statistics include:

• Brazil: The non-earmarked credit default rate, encompassing individual and business borrowers, reached 4.5% in April 2024, down 0.1 percentage points from the previous year.
• Latin America Corporate Defaults: Corporate defaults in Latin America are expected to be more stable in 2024, with a forecasted default rate of 4.6% for high-yield corporate defaults and 2.8% for the CEMBI Broad Diversified index.
• Regional Outlook: The overall credit outlook for Latin America is expected to be mixed, with some economies growing and others facing challenges.

These statistics indicate a general improvement in default rates in the region, driven by factors such as falling inflation, a resilient job market, and government support programs.
@sofiverse sofiverse
Think to adapt your money and model where the money flow .
Dont get stuck if your product does not mean demand or hard to deliver, aim for demand and goals we can achieve.