7 O'Clock Capital: On-chain reputation, a credit mechanism for quantifying Web3 on-chain behavior
Building a reputation system in the crypto world to assess fraudulent behavior, malicious actions, and contributions is very important.Author: 7 O'Clock Capital
Introduction
If laws, systems, and rules can keep society functioning normally amidst numerous interpersonal interactions, then the credit system propels society towards a healthy stage characterized by clear rewards and punishments.
In the credit system, different credit behaviors in various fields can be categorized into different credit segments, such as government integrity, business integrity, social integrity, judicial integrity, and so on. Credit is particularly important in financial activities. Some countries even establish financial credit scores specifically for credit lending to assess the credit limits and ratings of individuals or organizations.
In the crypto finance industry, smart contracts have enabled trustless transfers and transactions. The current Web3 mainly revolves around financialization and transferable assets. However, many subjective crypto behaviors, such as establishing online personas and unsecured loans, rely on non-transferable social relationships for realization and continuous accumulation. At this point, constructing a reputation system in the crypto world to judge fraudulent behaviors, malicious actions, and contributions becomes very important.
Table of Contents
- On-chain Reputation in the Crypto World
- Classification and Examples of On-chain Reputation Projects
- The Future of the Crypto Reputation System
I. On-chain Reputation in the Crypto World
The emergence of smart contracts provides a guarantee for trustless transactions. Based on this, as Web3 application scenarios become richer, more interactive activities have given rise to decentralized identities (DID), such as Web3 domain names, allowing users to navigate various applications without repeated logins.
With the advent of domain names, we can query all on-chain data associated with them, including transfers, purchases, transactions, interactions, and more. Additionally, users' activities in various Web3 social applications also leave behind proof. Therefore, all on-chain activity data corresponding to a domain name will accurately reflect the characteristics of the user, such as the size of their funds and their activity level in various DApps.
(1) The Importance of Building On-chain Reputation
If decentralized identity is the future, then the behaviors associated with wallets or domain names will form the foundation of online personas and reputations. On-chain reputation will play an important role in quickly identifying the credit and characteristics of Web3 identities. This can be summarized in the following points:
1. Achieving On-chain Identity in Web3
Currently, what we refer to as on-chain identity is merely a wallet address or domain name composed of a string of letters or numbers. Essentially, it is just a form of identity information, similar to a person's ID information in Web2. In real life, an identity can engage in various social behaviors, corresponding to different social roles and generating different social relationships. The web of social relationships formed by multiple social roles constitutes identity.
In Web3, a true on-chain identity can only be formed by the combination of various social behaviors generated by an address or domain name. For example, if an address frequently uses Uniswap, the on-chain reputation system can quantify this behavior, thus creating a role such as "Uniswap Enthusiast" or "DEX Enthusiast" and adding it to the corresponding address's social relationships for quick identification by others.
2. Ensuring the Uniqueness of DID
In Web2, our ID cards and passports can only correspond to one real individual. If ID cards or passports are forged, one real individual may correspond to multiple different identities. When authenticity needs to be verified, it requires checking their life trajectory and behaviors, as well as social relationships, which need to be formed through personal historical accumulation.
In Web3, a user's on-chain identity is their DID. There is no forgery because a real individual can create multiple addresses and own different domain names. Without an on-chain reputation system, determining whether these addresses belong to the same person requires examining IP addresses, the similarity of historical on-chain behaviors, and the relationships between addresses, which is costly and inefficient. The existence of an on-chain reputation system quantifies and categorizes the historical behaviors corresponding to the DID, presenting them in a very clear manner. This not only proves the uniqueness of the DID but also enhances identification efficiency.
This also indicates that the real individual corresponding to the DID needs to accumulate on-chain behaviors over the long term to gain corresponding reputation.
3. Providing a Reliable Trust System
In Web3, decentralized identities have the characteristic of anonymity, while users need to prove that their behaviors are not malicious. At this point, the emergence of on-chain reputation can provide proof of user behavior while protecting privacy.
Moreover, with numerous types of blockchain projects, users can establish reputation in specific segments to clearly demonstrate their talents or contributions in those areas, enhancing fairness. Additionally, the lack of reputation in a certain segment can be remedied through other behaviors recorded on-chain, which also improves credibility to some extent.
For project parties, wanting to attract more real users and prevent witch attacks can also utilize the on-chain reputation system to check the reputation of addresses, thereby reducing bot addresses and distributing rewards to real contributing users.
4. Facilitating User Identification and Targeted Marketing
The on-chain reputation system forms various labels for users based on their behaviors, such as NFT enthusiasts, traders, etc., thus achieving a user profile for Web3 to some extent. One of the main functions of user profiling is the precise matching and marketing of market supply and demand, improving the circulation efficiency and activity of the ecosystem.
For example, in lending activities, suppliers can quickly retrieve the credit index of users in related categories through on-chain reputation, thus assessing the amount of funds to lend. Without a clear on-chain reputation system, results would require analyzing most of the user's on-chain behaviors.
For various projects and applications, this can achieve precise identification of loyal users and improve the matching degree of market marketing. For instance, a music-related DApp can use the on-chain reputation system to identify the real participating users and long-term accompanying users of the project, as well as discover users who are highly active in the music field, thus achieving high-matching marketing.
In summary, the on-chain reputation system can play a positive role in Web3 and the entire crypto world.
(2) Current Challenges in Building On-chain Reputation Systems
Establishing a relatively complete reputation system is not an easy task, and it faces various difficulties during implementation.
1. Short Time for Users to Build Reputation
The on-chain reputation system quantifies and evaluates users based on their historical on-chain behaviors. Therefore, for users to obtain a good reputation, long-term credit accumulation is required. For new users entering the crypto world or new users entering a specific field, the role that the on-chain credit system can play is very limited. Thus, whether the standards of the reputation system in the crypto world can have criteria beyond time is worth considering by the industry.
2. Processing Large Amounts of Complex Data and Classification
On-chain, a massive number of operations are recorded every second. Therefore, how the reputation system classifies these behaviors into categories such as transactions, NFT minting, and third-party DApp interactions, and then displays them to each identity's corresponding address or domain name, is a very complex process. Additionally, in the category of third-party interactions, if it is necessary to distinguish between social, gaming, and other types of behaviors, strong technical support is also required.
3. Credibility of Entities Building On-chain Reputation in the Crypto World
In Web2, social credit systems or financial credit are issued and supervised by the state or financial institutions, possessing sufficient authority. Therefore, society recognizes the reputation system and data established by them.
In Web3, it is more beneficial for entities with certain industry authority or higher recognition to establish reputation systems, thus aggregating more applications and forming certain reputation standards. Alternatively, the entity of the reputation system may have sufficient capability and collaborate with enough projects to reach a consensus on reputation standards, making realization possible.
4. Lack of Interoperability Between Public Chain Ecosystems
Currently, there are more and more ecosystems centered around public chains. Although there are cross-chain methods to connect assets, the interoperability between public chains is extremely limited. It can also be anticipated that creating a reputation system for a single ecosystem is easier than for the entire crypto world. However, enhancing interoperability between public chain ecosystems is also a key issue to be addressed in the future, and thus, the reputation system will develop in this direction.
II. Classification and Examples of On-chain Reputation Projects
Vitalik Buterin mentioned in his paper "Decentralized Society: Finding Web3's Soul" that the current Web3 is almost centered around "financialization and transferable assets," while decentralized society needs to rely on "non-transferable assets" to establish trust relationships and weave social networks.
He further proposed the concept of "Soulbound Tokens" (SBT). The "soul" refers to accounts, wallets, etc., which can hold SBTs that are non-transferable, potentially revocable, and initially public, with future private SBT use cases also being feasible. SBTs can track the social relationships and experiences of wallet accounts.
This has greatly inspired the establishment of on-chain reputation systems, and many projects have begun to assess the credibility of identities from the perspective of SBT.
7 O'Clock Capital has sorted out the main projects constructing on-chain reputation in the current crypto market, which can be broadly categorized into the following types based on different use cases and implementation methods:
(1) Data/Behavior Tagging
This category involves user profiling based on the trading trends and on-chain behaviors of addresses, tagging them accordingly for viewing. Subsequent tracking of these addresses' movements will continue to form data analysis. A typical example is the blockchain data analysis tracking platform Nansen.
Nansen enhances real-time on-chain data signals by tagging crypto wallets. Currently, Nansen has tagged over a hundred million wallets, including public addresses of Vitalik Buterin and some funds, as well as many anonymous addresses with significant capital. Both retail and institutional investors use Nansen to discover trading opportunities. The platform currently supports public chains such as Ethereum, Polygon, BNB Chain, Avalanche, Fantom, Arbitrum, Ronin, and Celo.
Nansen's features include viewing the funding status and movements of specific addresses, NFT, DeFi market conditions, trading masters, specific token wallet holding addresses, and large holders. One of its most distinctive features is "Smart Money," which labels addresses based on their trading profitability, such as "Airdrop Expert" or "Smart NFT Trader." For example, if an address receives a large number of tokens in multiple airdrops (the value of the airdrop is based on the average value over the 30 days following distribution), it will be tagged. These addresses are further divided into those that exploit airdrops or interact with selected protocols, with users needing to focus on the latter to track these smart addresses for profit opportunities.
The implementation of wallet tagging is achieved through algorithms, team analysis, research, and community contributions, with complex data aimed primarily at experienced traders and institutions, requiring payment for access.
(2) DeFi Credit Scoring
This type of project scores addresses by analyzing and processing their historical trading behaviors on-chain, thereby providing credit support for lending, with representative projects including:
ARCx is a decentralized scoring protocol that supports on-chain identities and credit score-based lending. Credit scores are determined by analyzing the historical activities of user addresses. ARCx has also established machine learning models to backtest the classification of liquidated or non-liquidated positions, reflecting the correlation between on-chain activity and credit risk.
The better a borrower's historical trading credit (e.g., no history of liquidation), the higher their score and loan value ratio. Currently, ARCx focuses on DeFi credit scoring, making lending no longer indiscriminate and reducing related risks to some extent.
Spectral is a programmable, open on-chain reputation scoring system where users can obtain credit scores based on their on-chain interaction activities, while also supporting integration with any DApp. By assessing risk through credit scores, it aids in the utilization of on-chain capital, helping users achieve fair loans.
Its on-chain scoring is achieved through MACRO (Multi-Asset Credit Risk Oracle), supported by machine learning algorithm models created from DeFi datasets, which can be updated in real-time based on the development of on-chain applications. In addition to DeFi, Spectral is also incorporating other data sources, such as NFTs, and is attempting to extend the scoring system beyond Ethereum.
The MACRO score supports users in obtaining scores using a single wallet as well as allowing a user to generate scores based on the historical data of multiple wallet addresses. The Spectral application automatically retrieves all DeFi and non-DeFi related transactions associated with one or more wallets, using machine algorithms to generate on-chain credit scores.
(3) Badges/Proofs
This category of projects displays the reputation of valid addresses by issuing specific badges or proofs. Implementation forms include POAP, SBT, and third-party badge NFTs. Some of these proofs possess non-transferable characteristics to ensure that specific behaviors belong to specific addresses, preventing the construction of false reputations through buying and selling transfers.
POAP, or "Proof-Of-Attendance Protocol," records and commemorates the occurrence of specific events by distributing crypto badges, thereby generating proof of participants' presence.
POAP was initially created at the ETHDenver conference in 2019 to reward hackers who attended and participated in hackathon activities. In October 2020, POAP migrated to the Ethereum sidechain xDai due to its faster speed and lower transaction costs, allowing issuers to mint POAP at a very low cost.
Users can obtain unique badges through links and QR codes provided by event planners and organizers, recording their experiences in the crypto world, thus forming identity credentials with real proof.
Current applications include proof of attendance at online and offline crypto events, recording milestone events in blockchain games, community contribution rewards, and some ceremonial commemorations outside the blockchain field. POAP has, to some extent, realized the integration of real life and virtual life.
Gitcoin Passport is a Web3 identity verification aggregator launched in Gitcoin 2.0 to prevent witch attacks. Users can collect "stamps" from different verifiers in Web2 and Web3, which are verifiable credentials. The Passport aggregates multiple stamps and assigns trust. After integrating with dApps, they can verify identities through custom algorithms, which can also set different stamp weights based on different preferences in the algorithm.
Currently, Gitcoin Passport aggregates identity verification projects or platforms including:
Operational Process:
Users link their wallets and verify their identities across various platforms on the Passport page, thus forming corresponding badges.
Any on-chain project can easily implement digital identity verification through Passport's SDK, which can not only determine whether users have used multiple wallets in the system but also verify users' membership in different communities and their participation in various projects.
This provides a new way to view online identities, recognizing users while also building their digital reputations.
Advantages:
Aggregates multiple high-weight Web2 and Web3 platforms, clearly and conveniently achieving data composability and interoperability;
Provides project parties with a channel to verify user identities, effectively preventing witch attacks;
Protects user privacy while verifying identities through custom algorithms, providing verifiable identity credentials.
Noox is a platform for Web3 users to mint badges based on on-chain behaviors to prove achievements. Application or community planners can embed any rules in the badges, such as interaction counts, amounts, etc. Users can discover related activities through the Noox platform, link their wallets, and mint badges if they meet the criteria.
These badges will be non-transferable soulbound NFTs, allowing anyone to mark on-chain interactions as attributes or achievements. Users can also showcase their interests and accomplishments through this.
Noox Badge refers to the non-transferable NFT of on-chain achievements on the platform, visualizing what users have "done" on the blockchain through pure text and graphics, such as trading on OpenSea, providing liquidity for Uniswap, donating on Gitcoin, etc.
The project launched a closed beta product with Web3 profiles and badge browsing features in early May.
(4) Marketing Promotion Tools
As airdrops have gradually become one of the means to attract a large number of users, various phenomena such as single-person batch account creation and bot fake operations have become frequent. Project parties need to spend time and human resources to distinguish between witch attacks and fake operations, but the results are not satisfactory. At this point, the market has seen the emergence of tools that help users filter real users. Users can execute tasks, bind Twitter, Discord, and other accounts, and complete specific interactions to obtain specific badge NFTs, thus increasing the cost of completing tasks, which also limits some fake accounts to a certain extent.
Through this tool platform, project parties can achieve marketing goals while obtaining most real user data.
Launched by the Web3 infrastructure service provider Galxe (formerly Project Galaxy), it collects credential data through on-chain interactions and off-chain integrations with Twitter, GitHub, and other data sources for network management. DApps can use credential data to calculate credit scores, find target audiences, and reward contributing communities; Web3 developers can utilize credential data to build better products and communities.
Products:
Galaxy ID: Users can generate a Galaxy ID after linking their wallets, representing their multi-chain/multi-wallet identity in Web3. Based on users' historical behaviors, the ID automatically displays labels such as "Uniswap V3 Trader," "OpenSea Trader," etc. Users can also showcase the credentials collected in the Web3 world through their Galaxy ID, such as NFT badges, highlighting their achievements.
Galxe OAT: A lightweight solution for event organizers and community managers to easily create and distribute NFT badge activities and reward community members using Galxe's NFT infrastructure and on-chain credential data network. In simple terms, project parties can create their own pages on Galxe, submit parameters and badge designs, and users can mint badges without gas fees after completing related tasks.
Currently, the official site shows support for eight public chain ecosystems, with thousands of partners already collaborating and many minting activities underway.
Guild is a gatekeeping application based on DID. Through the Guild platform, entry conditions for Discord or Telegram can be set, such as holding certain tokens or NFTs. Currently, there are over 3,000 gatekeeping tasks based on numerous projects, with the latest role task for the well-known Layer 2 Arbitrum being conducted through this platform.
Users can confirm roles after completing tasks released by projects, which can help prevent bot volume manipulation to a certain extent, allowing projects to filter loyal users for rewards.
(5) Privacy-Protected Proofs
On-chain reputation proves creditworthiness to others in various forms, including many public information about users. If these data are misused, users may suffer certain losses. Therefore, some projects aim to establish credible reputations from the perspective of protecting privacy.
Sismo is a modular proof protocol on Polygon, focusing on decentralization, privacy, and usability, issuing proofs in the form of non-transferable badges. It features the use of zero-knowledge proofs to issue badges to users' other accounts (such as ENS, Twitter, or GitHub) to establish their Ethereum profiles, allowing users to aggregate their reputations into public profiles while maintaining confidentiality.
Based on user/wallet interactions, Sismo allows users to apply for ZK certification. Using Sismo's SDK, developers can now utilize Sismo's certification to lock user groups. Currently, it is still in the alpha testing phase.
Application scenarios include: anonymously proving ownership of NFTs without revealing which BAYC and which Ethereum account (and its complete history) to prove ownership. Additionally, ZK badges can be used to access holders' communities without disclosing specific transaction data to obtain better loan rates in DeFi.
(6) Identity Resume
On-chain reputation can also be selectively constructed by users and displayed in a clear and comprehensive interface. Such platforms mainly help users integrate their reputations, similar to a Web3 identity resume, which includes various activities and social networks corresponding to their identities.
Link3 is a Web3 social network application developed by CyberConnect, understood as a verifiable DID. Through the platform, users can aggregate their on-chain and off-chain data onto one page, roughly equivalent to Linktree + Twitter feed. For example, an organization's official website, team, Mirror, Twitter, Discord, Web3 credentials, NFT gallery, etc.
By establishing trust through verifiable connections and enriching identity significance through relevant experiences and backgrounds, users' rich Web3 identities will be formed by on-chain organizational relationships, asset credentials, and activity participation data, similar to how users in Web2 showcase their nature by following others and publishing content.
In summary, verifying the credibility of identities and displaying them has been driven by the development of Web3, DID, and SocialFi. Users are no longer satisfied with merely having decentralized identities; they pursue the weight, taste, reputation, and status of their identities. All of this needs to be reflected through on-chain behaviors and on-chain social interactions.
Enhancing one's identity credibility through task completion is largely driven by the benefits of project airdrops. Before these certification projects emerged, any project wanting to airdrop to users had to contend with witch attacks, fake volume issues, and other problems, resulting in unfair and uneven distribution of user rights.
However, currently, on-chain reputation has not formed a system, and it exhibits decentralization, single functionality, and limitations due to cross-chain issues, with its development potential yet to be witnessed.
III. The Future of the Crypto Reputation System
Based on the current development status and characteristics of the crypto reputation system, combined with the future trends of Web3, its future development directions can be summarized as follows:
1. Public Data Standards
Quantifying on-chain reputation requires certain standards that are publicly accessible, such as who sets these standards, whether they are determined by technology or recognized by society, in order to form a certain level of authority and credibility. Additionally, the management of reputation data also needs to be open and transparent, such as distinguishing the display methods of contribution proofs and transaction records.
2. Diversification of Applications
Currently, reputation applications are extremely limited, only existing in specific scenarios such as DeFi credit lending and airdrop rewards. The future development of reputation system applications should be diversified, encompassing various aspects of decentralized society in Web3, whether linking Web2 or purely on-chain. Multi-faceted applications can not only enhance circulation efficiency but also improve overall social creditworthiness.
3. Clear and Comprehensive On-chain Social Graphs
One of the key points in Web3 is decentralized social interactions. The reputation system can help users build a more comprehensive personal resume, making the on-chain social graph clearer and more visible. Users can showcase their abilities through various certifications and their loyalty to NFTs, protocols, ecosystems, etc., thereby presenting their reputations within the entire social graph, which is also beneficial for users to engage in a series of other activities.
4. Positioning User Profiles for Targeted Marketing
Even in Web3's decentralized identities, there are different roles, such as traders, NFT enthusiasts, etc. One of the developments of the on-chain reputation system is the data classification of identity roles and precise positioning of user profiles. When it is necessary to view a user's reputation in a specific field, it can be done more conveniently. This also facilitates market promotion and marketing, allowing for lower-cost acquisition of more precise user groups.
5. Privacy Protection
On-chain reputation is built on credibility, but some users may not want to display all their behavioral data. This raises the question of how to protect users' partial privacy while constructing on-chain reputation. As mentioned above, Sismo has made privacy protections. It can allow others to trust a user's certain characteristics without revealing the user's specific behaviors or assets. In the future, there may emerge forms where viewing a user's specific reputation requires certain conditions to be unlocked.
6. Multi-entity On-chain Reputation
So far, the projects constructing on-chain reputation have focused on crypto users, but the need for reputation is not limited to users; projects and institutions also require it. This also facilitates users in better filtering projects of interest in the crypto world and ensures the credibility of their information.
Conclusion:
On-chain reputation is driven by the continuous development of DID and SocialFi, playing an important role in constructing rich identity content and social graphs in Web3. However, the current on-chain reputation projects are relatively singular and have not yet formed a basic structure, merely established based on specific market demands. With the further development of DID and the establishment of consensus on on-chain reputation, it is believed that a mature on-chain reputation system will emerge in the future.
