Skin in the Game

Aug 12, 2022

Avoid taking advice from someone who gives advice for a living unless there is a penalty for their advice — Nassim Nicholas Taleb

From the inception of RociFi, many investors and crypto onlookers noted that blockchain-native under-collateralized lending (UCL) was the “holy grail” of DeFi. The ability to issue pseudo-anonymous loans to borrowers based solely on their on-chain history and reputation would unleash an entirely new asset and credit class.

This “Promethean moment” of giving fire to the people in the form of a decentralized credit score, could allow billions of consumers around the world access to capital markets where they may have been locked out previously.

However, as with any new innovation, there is risk associated with it. Risk isn’t a reason to not undertake something, but it does necessitate prudent risk management. Luckily, the RociFi core team is filled with executives and advisors who have a wealth of experience in mitigating risk in TradFi, Tech, and Blockchain arenas.

Unfortunately, many of the aforementioned investors and onlookers took the form of risk aversion and naysaying — choosing to be a critic on the sideline rather than the “person in the arena” looking to solve this massive problem.

RociFi is happy to report that since our launch on Polygon 1.5 months ago, we have issued 729 pseudo-anonymous under-collateralized loans and minted 11,000 unique NFCS credit scores.

We knew from inception that RociFi needed to be “In the arena” rather than trying to solve the problem from the sidelines. Meaning, the protocol needed to issue the on-chain credit scores and the under-collateralized loans — the equivalent of being the credit bureau and commercial bank simultaneously.

Otherwise, why would anyone trust our scoring if we’re not issuing the loans ourselves? Furthermore, the protocol needed to be a liquidity provider in its lending pools, thus putting our capital at risk alongside our depositors’ — aligning incentives.

In short, we needed to have skin in the game, i.e. the risk of financial loss. Period.

The above logic is simple. If we are telling depositors to risk their capital on our credit scoring, then we must be willing to bear losses as well.

In future versions of the protocol, the governance token can be staked by users in order to ‘backstop’ the lending pools in the event of losses. The stakers will be rewarded with protocol fees for having ‘skin in the game.’

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.” — Theodore Roosevelt

As noted previously, there was no shortage of critics regarding the feasibility of blockchain-native under-collateralized lending. Even worse, others looking to tackle this issue besides RociFi have chosen to do so from the sidelines, i.e. curating on-chain credit scores without issuing under-collateralized loans themselves. We believe this is flat out incorrect. How is one supposed to issue credit scores for under-collateralized loans without actually issuing those loans?

This equates to providing advice without penalty in the event it’s incorrect. This misaligns incentives and is the essence of why having skin in the game is paramount to bringing blockchain-native under-collateralized loans to the masses.

CONCLUSION

If DeFi is to cross the chasm into mainstream adoption, it must have blockchain-native under-collateralized lending. This cannot be accomplished on the sidelines, only by entering the arena and risking loss can this really happen. RociFi is that person in the arena with its incentives firmly aligned with their communities’.

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