Introducing ARCx Sapphire (v3)
Valuing on-chain identity. No Banks, No KYC, 100% Crypto Native.
|Michael Elisha||Jun 1||10||2|
Summary / tl;dr
ARCx Sapphire (v3) will allow the protocol to issue its DeFi Passport that incentivizes reputation-building and curates on-chain identity int DeFi. The essential elements of this new release are that the:
Protocol can assess on-chain activity and history to deliver the first ‘page’ of the DeFi passport as a ‘credit score’
The credit score is number (0-1000) that assesses credit risk in DeFi
Identities issued quantitatively ‘good’ credit scores will gain access to low-collateral loans and high-yield farms
Initial release will begin with a limited number of first edition DeFi Passports
Future issuance will be based on demand and will continue in limited batches
Performance of the DeFi Passport and credit score will be assessed and iterated to provide even more sophisticated relationships between on-chain activity and identity
DeFi Passport will be integrated with more DeFi protocols to provide new functionality and increased value
Project roadmap has been financed by a new $1.3M in fundraising round led by Dragonfly Capital, Scalar Capital and Ledger Prime bringing the total amount raised till date to over $8m
Reputation in DeFi is broken. Entities are encouraged to repeatedly abandon identity in pursuit of maximum risk, short-term reward, and pain to others. Protocols are left to treat every user the same, occasionally giving preferential consideration to wallet size, institutional backing, or restrictive KYC. ARCx Sapphire (v3) reevaluates reputation in crypto through the issuance of a new fundamental form of on-chain identity: the DeFi Passport
As national passports are valued by entities and used by countries in the political world, the DeFi Passport incentivizes building on-chain identity and creates utility for decentralized protocols. As proof of the value proposition of the DeFi Passport, its first page will be an on-chain Credit Score. This first page incentivizes both individuals and protocols to value the reputation embodied by the DeFi Passport, and this immediately allows for greater risk-adjusted capital efficiency for borrowers and lenders. The Credit Score is just one of many metrics to be included in ARCx’s DeFi Passport, but it proves from the very first implementation that the DeFi Passport will restore value to reputation and identity on-chain.
This first implementation of the DeFi Passport will analyze an Ethereum address’ activity to assign the Credit Score. ARCx can then deliver unique borrowing opportunities consummate with the reputation and identity of that dynamic score in a given DeFi Passport. Specifically, this means the DeFi Passport will allow the ARCx protocol to pseudonymously profile identities in DeFi to enable hyper competitive collateral ratios (for example, 105%). Two of the most unique attributes of the ARCx DeFi Passport is that it (1) lives on-chain such that any protocol may point to it as a useful source of information and (2) embraces highly-valued standards of pseudonymity from an individual or a collective.
To learn more about the full specifications of the Sapphire (v3) release, read here.
The Sapphire (v3) release affirms the vision of ARCx as a commanding force---a decentralized bank, if you will---in DeFi. To support the momentum and breadth of this vision, ARCx is honored to announce $1.3M in a new fundraising round led by Dragonfly Capital, Scalar Capital, and Ledger Prime. This fundraise was secured with ARCx Governance Token (ARCX) pre-split for $7,500US per token with a 6 month lock up, vested equally every month. As exciting as it is to add (or further commit) these entities to the ARCx investor list, it’s even more exciting to welcome these investors as mentors aligned with the vision of ARCx, especially as it relates to valuing reputation and on-chain identity in the Sapphire (v3) release.
Tom Schmidt from Dragonfly Capital Partners quoted the following:
“DeFi today is like the Wild West. People can walk up to any random protocol, front-run users, rack up a bunch of bad system debt, and bounce over to the next town. If we’re going to build a new global financial system, we’re going to need something better than the pseudonymous systems we have today. ARCx is taking us to this next evolution of DeFi by giving users digital passports based on on-chain activity and rewarding them for being good actors. The future doesn’t look like FICO.”
Indeed, valuing reputation in DeFi has always been an essential element of the ARCx protocol. The genesis of the DeFi Passport in this Sapphire (v3) release comes from our community-only launch in September 2020, where we created a scheme called “Know Your Farmer” (KYF). The KYF scheme enabled a means to reward early users of the ARCx protocol based on how and when they interacted with certain contracts on-chain. In pursuit of a fair launch, this innovation resulted in ARCx heavily relying on pseudonymous identity throughout its growth to reward reputable first adopters with ARCx Governance Tokens. From its very origins, then, ARCx has attracted the most sophisticated users in DeFi and brightest minds in fundraising to address the problems of reputation and identity in DeFi.
You can read more about the initial Know Your Farmer raise here.
DeFi Passport Phase 1
The first iteration of our product will enable identities to claim their DeFi Passport with the exclusive clause that the applicant’s address passes the ‘real’ (non-bot) identity threshold test. The factors regarding this test will not be disclosed to prevent gamification around its issuance. Beyond initial roll-out, protocols that wish to integrate the DeFi Passport will gain more access and input into the continuous development and implementation of these factors that determine ‘real’ identity.
In this first step, once an identity receives their DeFi Passport, they will then be able to access ‘Passport Powered Farms’ which will offer exclusive and high APYs that are incentivised by ARCx and our genesis launch partners.
With time, DeFi Passport holders will then be issued with a Credit Score which will mark the commencement of Phase 2. This Credit Score can then enable dynamic terms for borrowing depending on the borrower’s identity.
DeFi Passport Phase 2
The second phase for V3 will commence with the initial collateral ratio being the single variable that will dynamically change depending on the borrower’s credit score. The protocol will push this system to its boundaries early on - but at a small scale in order to minimize risk.
This will be achieved in two ways:
Enabling on-the-boundary risk parameters, i.e. offering 105% collateral ratio loans for ETH & BTC. This not only demonstrates the value proposition of using on-chain identity, but also allows us to incentivize repaying under-collateralized debt.
Offering the most credit to what we believe are the highest quality borrowers. The initial thesis for what a good borrower looks like is something along the lines of:
a. Had a loan on Compound/Maker/Aave for a minimum duration
b. Has never been liquidated
c. Maintained a large collateral position while maintaining a high (time-averaged) collateral ratio
d. Actively repaid loans during days of high market volatility
Additionally, ARCx has built and continues to explore machine learning models to backtest classification of ‘liquidated’ or ‘not liquidated’ positions. These models provide interpretable correlations between on-chain activity and credit risk that will make ARCx’s DeFi Passport Credit Score model more sophisticated than traditional, actuarial credit score models.
The Credit Score will be judged on a scale from 0 to 999, with the 999 score being the most lucrative. Ultimately this credit score will then be used to determine what collateral ratio the ARCx protocol will offer the user.
How to the DeFi Passport Credit Score is Used
The moving pieces in the initial implementation of Sapphire (v3) are best visualized with a concrete example: consider a single collateralized account, called here a ‘vault,’ with a dynamic collateral ratio set by the vault owner’s DeFi Passport Credit Score. In this case, the Vault (which contains collateral + user’s holdings), passes a set of numbers to a smart contract Assessor. The Assessor will request the user’s credit risk on a scale from 0 - 999 from the Credit Score.
This score will then be mapped onto a continuous distribution relevant for modifying the Vault conditions through a function called the Mapper. The result is then returned to the Vault in order to return the user’s specific collateral ratio. Note the DeFi Passport Credit Score is not a frozen number; it can be updated as needed to provide the most relevant information and a dynamic collateral ratio. This example demonstrates how the DeFi Passport Credit Score in particular adds value to on-chain lending protocols, but this process can be generalized to be integrated with any range of DeFi protocols and their relevant parameters.
Applying for a DeFi Passport
With security and adaptability being a paramount concern, the rollout of the ARCx DeFi Passport will initially take place in batches.
The first batch, or Batch #01 will consist of 100 addresses representing 100 unique identities. The identities who are in this first batch will receive a ‘First Edition’ version of the DeFi Passport, which will provide that identity with benefits within the ARCx ecosystem. Batch #02 will then receive a ‘Second Edition’ version of the DeFi Passport, and so on.
To apply for a batch, you must visit arcx.money, connect your wallet and send 1000 DAI to join the waitlist. To minimize bad actors and encourage long-term engagement, identities who deposit the DAI to join the waitlist will have their DAI held as a deposit for an amount of time explicitly published on the web3 application page. This deposit holding time may ultimately change over time, e.g. based on the edition of the DeFi Passport. For example, the First Edition DeFi Passport may hold this deposit for one year, while future editions of the DeFi Passport may hold the deposit for multiple years.
Early ARCx DeFi Passport holders will benefit by:
Having exclusive access to yield farming opportunities,
Be able to borrow at the lowest industry collateral ratios.
Having access to other offers depending on what batch, or what Edition Passport they received.
Details around the date of the first Batch will be released in the coming weeks.
The ARCx DeFi Passport is envisioned to become as essential to the DeFi ecosystem as the passport is to the national system. Beginning with the value ARCx provides in special lending and farming terms for DeFi Passport holders, this larger vision for the DeFi passport is readily delivered through a positive feedback loop in user experience:
The more valuable the DeFi Passport becomes to users, the higher the fidelity with which users’ individual behavior is described by the metrics within it (in v3, the Credit Score);
The higher fidelity the value of information provided by the DeFi Passport, the more DeFi protocols and new use cases will provide value to integrate it
Step (2.) feeds back into step (1.), increasing adoption and ‘stickiness’ for the DeFi Passport
Beyond the initial proof of concept with the ARCx DeFi Passport Credit Score, the opportunities for pseudonymous profiling and scoring of identities based on on-chain activity in a decentralized manner are limitless. In the near future, ARCx plans to continue to add more scores and pages to the DeFi Passport. These would include:
“Yield Farming Scores” that evaluates whether a farmer has a long-term mindset, which shows support for a protocol's long term growth---as opposed to farming and immediately selling. A higher Yield Farming score based on these parameters could potentially enable favorable APY to incentivize a higher quality and activist community.
“Airdrop Score” that evaluates whether an address on-chain holds airdrops---again, showing support for a protocol's long term growth---or immediately sells their tokens.
“Governance Score” that signals to protocols and builders how actively a user is involved in on-chain governance. Beyond metrics of activity in governance, the kinds of decisions a user makes on-chain and the nature of their governance in given protocol(s) could be very telling of motives and future behavior.
“Trader Scores” which determine the differences between bots and real identities to give different rates based on how a protocol wants to interact with a counterparty. For example, a DEX could enable lower trading fees for identities compared to that for bots