First Announcement — Credit Score Model Update
With the latest release of RociFi’s credit risk model we are bringing some big changes. First, we are revamping how our scoring methodology treats depth of history in order to better distinguish credit risk among newer vs more established borrowers. Second, we are finally bringing credit migration to our users.
Under the September 2022 release, our scoring model is now adjusting borrower scores based on the depth of their credit history. For borrowers who have very few, or only a single loan, they can now expect a score of 10, while for borrowers who have taken many loans, they can expect their score to be nominally the same, or to even have improved (if they’ve already minted their NFCS).
When taken into account with other features considered under our model, this has produced a substantial de-risking in scores 1–9. Below is a comparison of the distribution of good/bad credit risk based on historical training data using both old and new model versions:
New Version (September 2022)
As we can see almost 76% of the bad borrowers observed on the historical dataset are moved into score 10, versus prior as a sizable portion sat on scores 6–9. In addition, we can see on scores 3–10 the percentage of bad borrowers has fallen. The frequency of scores concentrated at 3 is lower than prior as the distribution has widened between scores 1–5. Although the percentage of each distribution that sits on scores 7–9 is comparable, we note looking at the right axis the relative frequency of bad borrowers on these scores is much lower.
We estimate that given an under-collateralized loan, the risk of default on Score 5 and better is less than 0.6%, while on scores 6–9 is less than 2.99%. In the prior release the risk on scores 1–5 is actually slightly lower at 0.52% and below at score 5, however substantially higher on scores 6–9 at an average expected default rate of 3.99% as high as 13.69% by score 9. Thus the September 2022 release effectively moves much of the bad debt that would normally exist in scores 6–9 into score 10, but is comparable in risk (only perhaps slightly worse) on scores 1–5.
Unfortunately some borrowers with light history may see their score downgraded. Do not fear, if you go from a 6 to a 8 your estimated credit risk is ~26% lower than what it was estimated at before. This is ultimately now a better score.
In effect, the September update means that we can now offer better capital efficiency to borrowers across all scores. Ultimately, driving down collateral and interest rates to borrowers while increasing lender APY by reducing loan defaults.
Second Announcement — Credit Migration
Starting with the September 2022 update, thanks to enhancements made to our Credit Scoring Model, we are now able to include and evaluate borrower scores based on their lending history with RociFi. This is a very important milestone in our protocol’s development as it now means that a borrower’s score will dynamically update as they interact with the RociFi protocol.
Generally speaking, as long as a borrower pays back their loans on time, and borrows in a responsible manner, they can expect their credit score to gradually improve. This means borrowers who currently have worse scores can expect to move upwards over time into better credit ratings, enabling them access to better credit terms.
Generally speaking you can expect you credit score to improve if you:
Borrow and fully repay loans on RociFi (as well as external protocols)
Do not default (under-collateralized) or allow you loans to become liquidated (over-collateralized)
Maintain this position over a long period of time
Reasonably sized loans, i.e. ‘dust’ or bot addresses are not counted
Note: this process may be revised in subsequent releases as the protocol acquires more repayment data.
Third Announcement — New Protocol Coverage
Per our communities’ request, we have expanded protocol and blockchain coverage under the September 2022 release of our NFCS scoring model.
New coverage includes:
AAVE V3 Optimism
AAVE V3 Polygon
AAVE V3 Avalanche
AAVE V3 Fantom
AAVE V3 Arbitrum
The addition of Optimism and Arbitrum is exciting as it now means we are covering true layer 2 protocols under our NFCS. In the near future we will also be expanding our DeFi coverage to even further, which we expect to be ready for our October 2022 release.
Source : Polygon Medium