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This post is a snapshot of my understanding of the Bloom Protocol, its use case and the challenges that the platform is likely to face in the near future.
Source: pexels.com (CC Licence Image)What Problems Does Bloom Protocol Seek to Solve?
According to data published by the US Congress, in the United States, credit scoring is a monopoly which is controlled by just one entity — FICO. FICO is responsible for providing credit scoring to more than 90% of lenders in the US. This is a clear monopoly, and it is no surprise that the US Congress is looking into this, given the potential adverse impacts of having a monopoly in an area which is critical to consumer access to credit.
The situation in other parts of the world is worse. It is estimated that almost 40% of the world’s population does not have a bank account (most of these people based in South America, Africa and Asia). Up to 90% of people in developing nations experience difficulty in obtaining loans from financial institutions. I live in India, and I can vouch for the truth in these facts — the post below covers some of these problems in detail.
How Blockchain Technologies ‘Can’ Solve Real Financial Problems
The biggest issue with FICO and other credit scoring mechanisms in existence today is that they rely on past data to build estimates of credit worthiness. Therefore, getting a step onto the credit ladder is a catch 22 situation. A person who doesn’t have a credit history cannot obtain credit due to a lack of credit history. When faced with this situation, people usually resort to fraud or devious means to prove their credit worthiness. Or they end up taking loans from money lenders and other informal providers of credit, getting rooked in the process.
Another issue is that in a world of increased movement across borders, people need to build up a record of credit in every new country that they move to. Credit records are not portable from one country to another — leaving millions of people without access to credit when they move to a new country. According to a UN Report, 258 million people migrated to a new country in 2017 alone.
What is Bloom Protocol?
The Bloom Protocol is a decentralized and global credit protocol which seeks to facilitate on-demand, secure and global access to credit services. According to their white paper, here are some of the purported advantages of Bloom Protocol:
- Using the Bloom Protocol, users will be able to build credit identities and use these to obtain loans in a variety of currencies, without regard to geographical location, in fiat as well as cryptocurrency.
- Bloom allows users to build up credit scores even if they have not previously taken out loans, and can’t prove that they are credit worthy. To my mind, this is a significant innovation and will be invaluable if it can be implemented while keeping losses minimal across the world
- Given the global nature of the Bloom platform, lenders will be able to extend credit to lenders in all parts of the world, as long as they are able to satisfy regulatory requirements in their own country
- The way things stand currently, borrowers are required to give up vast amounts of personal information in order to obtain a loan. This data is then stored with various institutions, and is always vulnerable to identity theft. Given that Bloom is on the blockchain, users will benefit from the advantages of a blockchain — namely that it will be decentralized, tamper-proof, immutable and pseudonymous.
- As alluded to earlier, credit scoring is a monopoly in most countries, and a lack of competition results in borrowing rates which are not competitive. Bloom is not necessarily trying to replace the monopoly, it is a platform which will enable more players to enter the market, thereby bringing in a greater amount of innovation and choice for borrowers.
How Does it Work?
The Bloom Protocol has three moving parts to it, and they all work together to build a decentralized and global network for credit:
BloomID allows users to create secure identities and lenders to have confidence that these identities are not falsified or tampered with. Borrowers have control over their Bloom IDs and can choose to provide or revoke access to any lender or third party.
BloomIQ is the system which keeps track of loans taken and the payment histories of these loans, mapped to every Bloom ID.
BloomScore is a metric — a numerical overview of the credit worthiness of each Bloom ID.
BloomID, BloomIQ and BloomScore bring a number of innovations to credit scoring. I want to talk a little briefly about each.
BloomID is unique in that users can play an active role in building their identity. People within their network (friends and family) vouch for the information volunteered by users. This makes sense since people who don’t have IDs with centralized data centers (governments and local councils) can easily build a digital ID by inviting people known to them to the network. If they can use Facebook (assuming they haven’t #deletedfacebook following this week’s events), they will be able to use the Bloom network. The Facebook controversy is a great example of why it is necessary for every person on the planet to have control over the data they generate — by choice or inadvertently while using an online platform. Bloom is a great step towards this in the financial services space.
The most innovative part of the Bloom Protocol is P2P staking — a system for representing real world relationships between people and thereby letting people vouch for the creditworthiness and authenticity of people they know. An example of such staking is that if I were to vouch for your credit worthiness, I would only do so if I were confident that you would pay the loan back. My own credit worthiness is calculated based on the worthiness of the people I am vouching for, in addition to my own ability to pay back loans successfully. In this way, people in the network are incentivized to vouch only for those who are likely to pay back. This is integral to enabling a user to build up a BloomScore even if the user has previously not participated in the credit markets.
The BloomScore is a dynamic score which allows lenders and other stakeholders to quickly assess the credit worthiness of a borrower. The innovation brought by the protocol in this sense is that it allows a ‘bootstrapping’ of trust in a dynamic way. As a person builds up a history of actions on the network (either through staking peers or taking out and repaying loans), their Bloom Score is dynamically updated to reflect this.
BloomIQ is the third part of the protocol. It is a running record of all loans and payments mapped to a particular BloomID. One of the key features of this is that users are in control and can choose which lenders or assessors they want to give access of their BloomIQ to. Currently, with systems like FICO, users have no say over how their data is used by parties which store such data. This puts the power back into the hands of the user.
Bloom Token
The token which is native to the Bloom Protocol is called Bloom Token (BLT). At this point in time, a minimal amount of BLT is required by existing users to invite new users to the platform. This is to ensure that there is a certain minimum amount of friction in the system, which will ensure that people invite only trusted friends and family to the platform and this also acts as a disincentive to attackers who might want to create fake or malicious accounts. Future uses of the token are envisaged to be as follows:
- It will allow organizations to participate in evaluating user identities and creditworthiness
- It will allow all users to vote on changes to the Bloom Protocol
- Stakeholders who provide services on the platform (ID attestation for example) will be paid in BLT
At this point in time, I am not entirely sure whether there is a convincing and compelling use case for the BLT token. Therefore, I am neutral on the token from an investment perspective over the long term. Given that the platform has not yet been built, this will become clear over time.
Anticipated Challenges
As with most projects employing the blockchain in novel ways, the Bloom Protocol is incredibly exciting. However, I have a few reservations:
- It is incredibly difficult to get people in the developing world to start using platforms like this. Anyone who has worked in microfinance or in emerging markets consumer finance will tell you so. The most important task of platforms like Bloom will be education — as to why and how such a platform can help people. Stellar has a large team dedicated to exactly this.
- Although the team has probably already considered volatility, it makes no mention of how it seeks to help users tackle this volatility. Given that the actual distribution of loans will happen using various payment networks and in various currencies (fiat and crypto), the team will have to think through how it can reduce the impact of volatility on user repayments. It will have to work with lenders in this regard.
- The first usable product is going to be a credit card called Bloomcard. This is envisaged to be an Ethereum credit card, and will allow users to build up a BloomScore while the platform is being built. Related to the point above, users have to be made very aware of the risks involved in taking out loans in currencies which are very volatile. I am also unsure whether this card will be denominated in Ether and then converted to fiat currencies. If it is denominated in a cryptocurrency, there are enormous risks to users.
- Given the novelty of the system, and the intended global nature of the platform, lenders are bound to face major regulatory hurdles, depending on which country they are based.
- The growth of the platform will be severely constrained if most users opt to receive loans in fiat currency. This is because they will require bank accounts in order to receive and make payments, and outside of the developed economies, this is a major problem for people who lack access to credit. However, this is a problem beyond the control of the team.
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Crypto DeepDive: Bloom Protocol was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.
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