Credit

This project introduces a credit protocol aimed at solving one of DeFi's greatest challenges: enabling true uncollateralized lending while preserving privacy. At its core, the protocol links credit history to proof of personhood rather than wallet addresses, creating a system where reputation becomes valuable enough to deter defaults. Privacy is maintained throughout the entire process using zero-knowledge proofs, allowing borrowers to build reputation while remaining anonymous. This creates a unique balance where borrowers can protect their privacy while still being held accountable for their borrowing history.

To initiate a loan request, the borrower submits their loan terms and ZKP to the protocol. The protocol validates the information, verifies the proof, and checks for any history of defaults. It then triggers an interest rate auction where lenders bid to offer the loan at or below the borrower's specified maximum interest rate. If a suitable lender is found, the loan is granted; if not, the process ends without changes. Instead of relying on a centralized credit score, each lender can dynamically compute the credit score based on the borrower's credit history.

Repayment behavior directly influences the borrower's reputation among lenders. Timely repayments enhance reputation, potentially leading to better loan terms or higher credit limits. The protocol records successful repayments, allowing lenders to adjust their offers based on the borrower's demonstrated reliability. Conversely, if the borrower defaults, the protocol records this default and bars the borrower from future borrowing. This creates a powerful incentive structure where the value of maintaining good credit outweighs the short-term benefits of defaulting.

The underlying economic principles of the protocol are grounded in insights from the paper Credit and Anonymity (2024) by Schneider and Taudien, which demonstrates that feasible credit equilibria can exist even in pseudonymous systems. Key aspects include:

• Borrowers are incentivized to maintain a good reputation through consistent repayments, as this grants access to better credit opportunities.
• Borrowers optimally use a single account to maximize reputation gains, as managing multiple accounts dilutes their positive repayment history.
• Defaulting results in significant consequences, such as being barred from future loans, reinforcing the importance of repayment.
• Lenders rely on the protocol's records to assess borrower risk without accessing personal identity information, fostering a trust-based lending environment.

This represents a significant advancement in DeFi lending, finally enabling uncollateralized loans while solving the traditional challenges of privacy, default risk, and reputation management. It's a practical implementation of theoretical economic principles that creates a truly functional and sustainable credit system in the decentralized world.

The protocol is built as a collection of smart contracts, creating a secure, anonymous, and efficient uncollateralized lending platform. Its core objective is to enable borrowers to access loans without collateral while preserving their privacy and maintaining trust among participants.

The core technical components are:

• Integration with World: We've integrated World’s proof of personhood system. Their infrastructure provides a robust foundation for unique human verification while maintaining privacy. The integration, smoothly handled through their MiniKit SDK, ensures borrowers can prove they are distinct individuals—crucial for preventing Sybil attacks and double borrowing. The protocol's interface, built with Next.js, is implemented as a World MiniApp. This simplifies usage for users already verified on World.

• Smart contracts: These handle loan requests, validations, interest rate auctions, repayments, and default records autonomously. The contracts are deployed on World Chain. On-chain data is carefully structured to reveal only the minimum necessary information. We use events for off-chain tracking, allowing lenders to build their own reputation models while maintaining borrower privacy. The default registry uses a Merkle tree for efficient verification.

• Interest rate auction: We implemented a Dutch auction variant, forked from a16z's Auction Zoo Solidity library. It starts at the borrower's maximum interest rate and decreases until finding a match or timing out, efficiently finding the market rate while respecting the borrower's rate ceiling.

This setup creates a system that's not only theoretically sound but also practically efficient and secure. The protocol solves the issue of uncollateralized lending in DeFi while maintaining user privacy and trust. Our approach leverages cutting-edge cryptography and decentralized technologies to provide a practical solution to a long-standing problem.