Distributed Credit Chain: Ushering in the future of banking
Introduction to Distributed Credit Chain
I have to admit, I will not miss a banking hall, especially the waiting line typical of end months and festivities. I always felt exasperated after finding an excuse to leave work early in order to make it to the bank before closing time, only to find the line almost stagnant. At this point, you might ask why I would never miss a banking hall yet banking services are an indispensable part of life on earth. Am I moving to Mars? The answer is no. The reason why I am picturing a life without visiting a banking hall is that currently, there is a solution in the market which enables me to do “everything banking” just on my smart device.
I am not touting the conveniences of mobile banking, that has existed for a while. But even with the advent of mobile banking, you still have to pay a physical visit to your bank’s premises to handle the issues that matter, like applying for mortgages and loans. We are in 2018, and great things are happening. The world is advancing technologically at such a fast rate that most of our tech devices become obsolete within months of their issuance. Videos of actual hoverboards predicted as the futuristic means of transport in our favorite science fiction films of the 80’s are going viral on social media. Ironically, in the face of all the innovation and progress, banks still operate on the modus operandi established centuries ago by the likes of Giovanni Medici (1397).
The novel solution that is currently drawing all attention is the concept of decentralized banks on the blockchain. The decentralized banking concept, unlike the typical blockchain applications like cryptocurrencies (which typically attracts only crypto enthusiasts and speculative investors), has more relevant real-life use cases with the potential to change ordinary lives through convenient and equitable access to funding. In this field, DCC, Distributed Credit Chain seeks to be a major player and revolutionize banking as we know it especially in the sector of credit financing.
Using your typical financial institution, despite its obvious advantages, has some serious demerits that may not obvious to you the user. This can be attributed to the fact that you have gotten so used to the system in which all players sell the same product and treat you the same way, and with no benchmark for comparison, you have accepted the faults in the system as facts of life. Your conventional bank is your Plato’s cave.
The problem with centralized credit financing as we know it.
In the centralized credit model, institutions are highly driven by profit motive. In the process, they squeeze borrowers through high interest rates while reducing interest earnings from lenders to expand their profit margins.
Centralized credit service providers operate on the model of cost sharing. The cost of running operations in centralized credit services is mainly attributed to data management, client acquisition and payments of bad debts. These costs are passed onto the compliant borrowers through higher interest rates. This method of cost sharing unfairly adds costs to borrowers while limiting the profit margins of the credit agencies. Additionally, the cost-sharing model contributes to inefficiency in cost management.
Operating as single entities also mean that credit agencies miss out on the benefits of scale. Each individual institution invests separately in technology and research aimed at onboarding new clients and improving system operation efficiency. Additionally, computational power and resources are wasted in developing algorithms to determine client needs individually yet they all have the same client base. By using a communal platform, the redundancy of such efforts will be alleviated.
A centralized credit model gives these institutions monopoly over data, and therefore lenders and borrowers are unable to trade directly. There is a need for a credit service in which parties are able to transact without the spread imposed by the credit service intermediaries. Debtors and creditors will be able to achieve debit-credit balance through a consensus. All users in the network will contribute to its development, and maintenance and are directly rewarded for it.
Sometimes (we may all be guilty of this at a certain point in our lives) clients do not pay up the loan and ensuing credit to the issuing institution. The resolution of such cases requires the involvement of third-party debt collection agencies which contribute to costs and inefficiencies in running the credit system. The root of this problem is the lack of data sharing between different players in the credit financing sector. A data sharing system would deter cases of repeat test borrowing across multiple institutions or cases of bad debts to non-creditworthy borrowers.
THE DISTRIBUTED CREDIT CHAIN SOLUTION
“Distributed banking is built on the fundamentals of the blockchain technology,-decentralized, open, irreversible, autonomous and private,” Stewie Zhu, Founder, and CEO of DCC.
Distributed Credit Chain is a completely decentralized platform that leverages blockchain technology to onboard players in the financial industry in order to address the existing weaknesses of centralized financial models in addition to provide global access to funding.
The concept of Distributed Banking is to break the monopoly of traditional financial institutions through fair financial serviced and return earnings from financial services to all providers and users involved, so that each participant who has contributed the growth of the ecosystem may be incentivised, thus truly achieving inclusive finance. (Quoted from DCC whitepaper.)
The goals of DCC will be achieved through;
- Elimination of monopoly and profiteering
DCC will provide a decentralized marketplace that allows for democratic choice of credit partners. In a free market, prices will be determined by the functions of demand and supply rather than intermediaries.
“market participants will get returns and reallocate the data value by providing algorithms and computation on the blockchain.”
Data privacy protection
To protect the data privacy of the user, only the owner will have access to the data through a key. To provide data privacy, the data will be encrypted while in storage and during transmission. Alternatively, the concept of zero Knowlege proof can be implemented to ensure that parties can verify and authenticate data ownership without revealing the contents of the data.
Eliminating data monopolies
Blockchain technology returns data ownership and control to the users thereby eliminating the existing model in which data is stored with various third party agencies who monetize the data by selling it to advertising agencies or by directly targeting users through there own ads.
Creating a data marketplace
A standardized data marketplace will facilitate big data processing and management by data certification bodies in addition to bringing transparency to data valuation in the marketplace based on the frequency of use. Various financial institutions can directly tap into the marketplace through their IT systems to collect valuable data.
Utilising AI for risk control
The blockchain incorporates anti-fraud algorithms which utilize AI and deep learning to help financial institutions process client data without storing it. The blockchain enables the use of encrypted algorithms with built-in risk strategies which enable lenders to screen borrowers through a risk strategy service.
This initial screening service will eliminate the redundancy in the current system where those who are unqualified can still apply for loans after which credit institutions have to waste resources to review them. In the process, the unqualified applicant may incur unnecessary costs which could have been avoided. A direct result will be an increase in transaction efficiencies for financial institutions and the reduction in overhead costs.
Disclosing lending behavior
A credit history report is created on the blockchain with each borrowing process. On approval by the relevant parties, this data will be made accessible to other intuitions thereby preventing the problems such as repeat test borrowing and long term borrowing.
Facilitating data sharing and feedback
Through the DCC platform, all lenders can contribute in establishing a standardized personal credit rating system. Auditors and regulators can evaluate systematic risks more efficiently by tapping into the public data on the network.
I am of the opinion that the top highlight of DCC's bold strategy is to remove the redundancy of having each credit service agency invest computational power and resources in research and developing algorithms to analyze the needs of a population that are almost identical. All the algorithms can be built within one platform and made communally available in a way that they are easily customizable to fit a unique demographic.
The fact that DCC has incorporated government regulatory machines into its structure is commendable. In a world where most political systems are struggling with corruption, regulators and big data analysis institutions are afforded a formidable tool through tamper-proof records on blockchain which will enable them to analyze and respond to regulatory matters with efficiency and transparency.
Given DCC's fast-mover advantage besides being backed by a solid team and a working product, one can postulate that DCC is poised to disrupt the banking industry by addressing the inefficiencies of the current credit financing system to realize true inclusive finance.
You can join the conversation on the DCC's telegram group, or visit their website to learn more about decentralized banking. Below are the links to their community.