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Today we cover part 2 of on-chain reputations and identity. This tech could serve as a huge unlock for the crypto industry. We go over exactly why in this article. In case you missed it, here’s a link to part 1.
The Market Landscape
Before we evaluate technology and projects in this space, let’s examine whether we think it will be a winner-take all type market or whether there is room for multiple successful companies / protocols / tokens.
Scenario 1 - Interoperability And Network Effects Create FICO 2.0
As more users, businesses, and institutions adopt a particular reputation system, its value increases for everyone involved. This growth in value encourages even more users to join the system, creating a positive feedback loop. In the case of FICO scores, its widespread adoption by lenders, credit card companies, and other financial institutions has made it the de facto standard for assessing creditworthiness in the U.S. We think FICO 2.0 is a near certainty if a dominant participant (a national government or one of the biggest tech companies e.g. Apple) mandate the use of a particular solution. Otherwise, competition in web3 should be robust.
A dominant reputation system can offer significant benefits in terms of interoperability. When a single system is used by a majority of participants in the ecosystem, it becomes much easier to share and compare reputation data across various platforms and services. Poor interoperability has restricted competition in financial services for decades, but an open, on-chain system with developer APIs is the norm in web3 and DeFi. We don’t think interoperability will be the determining factor.
Scenario 2 - Specialization Based On Use Case, Differing Methods
While a single reputation system can benefit from network effects and interoperability, it is also possible for multiple winners to coexist in the on-chain reputation landscape. This can happen when different systems adopt varying methodologies, criteria, and specialization based on specific use cases.
Consider the BowTied community, where reputation systems focus on expertise in a particular field. Having deployed a smart contract for a reputable protocol, being endorsed as credible by another member, having a public wallet which has been paid by several DAOs over a long period of time, and so on are more useful for hiring decisions than a participant’s financial status. A BowTied algorithm could incorporate those factors, whereas another system may focus almost exclusively on borrowing and repayment history. Both systems could become market leaders in their niche.