Defining the Reputation Stack
Continuing our series on reputation and identity in DAOs and beyond… Here we discuss some of the emerging paradigms and key players involved in the reputation space.
A trusted layer is beginning to form in the DeFi ecosystem, one that reflects the much more fluid conception of identity in the post-web 2.0 internet. For most users, particularly younger users, there’s no longer a rigid or persistent web presence the way there was during the glory days of Facebook and Instagram, instead, there’s a constantly shifting bricolage of token-gated memberships, alternate identities, and preferred media.
Think of Howl’s Moving Castle, a cacophonic collection of objects rolling held together by an invisible force and rolling through a fantastic landscape—an idea that’s already been borrowed for Moving Castles, a gaming startup. Perhaps it will shake the old paradigm of life in web3, that it's a?dark forest?of MEV predators waiting to strike.
Creditworthiness assessment in the form of an on-chain MACRO Score and risk forecasting is a small fragment of the picture. Myriad other web3 startups are tackling identity and reputation, in different ways, enough that there’s an identifiable ecosystem.
Recent Developments Changing the Reputation Stack
The State of the Stack
Off-chain, reputation, and identity are a form of intelligence gleaned from a personal network or a combination of public and private sources. Choosing a restaurant might take the form of a scan through the Michelin Guide, a perusal of Yelp’s concealed reviews, attestations from friends and family, and how it might fit with your carefully manicured Instagram aesthetic. On-chain, this is a more quantitative process.
On-chain identity has been a hot topic the last few months.
What does identity look like in Web3 and what infrastructure is needed to support that vision?
To try and answer those questions, I did a deep dive into the Web3 identity landscape ?????pic.twitter.com/qwKT9AoXKH
— drew (@wandzilak_drew)?October 12, 2022
To most users, the treasure trove of public information available on the blockchain is completely opaque. Etherscan and its API are the most widely used blockchain information providers but what they provide is essentially raw material. The Graph and other blockchain infrastructure companies help digest this information flow by processing blockchain data.
Arkham Intelligence?is working to change this. Using intuitive, smart visualization tools, even ordinary users can map relationships between wallets and dApps and protocols. They also offer an easy way to track an on-chain portfolio and its positions, view transactions on Ethereum and various L2s, and sort and filter transactions in a variety of ways. It’s a simple interface with powerful results: they’ve helped identify major news as it happened, including wealth transfers by Voyager and massive stablecoin burns during the recent USDC de-pegging.
Wallet applications like?Zapper.xyz?or?Metamask's new portfolio site are also increasingly providing tools for wallet users to visualize their own wallets and those of other users. In combination with other publicly available information this can sometimes allow wallet deanonymization.
Spectral Finance approaches reputation and identity through a different lens. They have two primary products: their first product is?the MACRO Score, an on-chain creditworthiness assessment that assesses how likely an individual wallet (or agglomeration of wallets) is to be liquidated. Their second product provides customized bundles of wallet signals, which can be anything from NFT trading data and near-real-time risk forecasting.
Ultimately what Spectral, Arkham, and, on a slightly different scale, blockchain analytics firms like?Chainalysis?and?TRM Labs?provide are ways of visualizing and understanding relationships between wallets on the blockchain. Of course, the contents of the wallets are also important.
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What Lies Within (Your Wallets)
Non-fungible tokens (NFTs) offer more than digital scarcity. Spectral, for example, uses a version of an NFT, the NFC as a financial reputation primitive which contains a MACRO Score representing a wallet or aggregation of wallets. NFCs can gate access to lending pools or form part of a composable debt instrument. Other protocols use tokens to represent proof of attendance, reward loyalty, blacklist bad actors, offer KYC, or myriad other uses.
One way to begin categorizing them is to divide them by their essential qualities. What are the basic parameters of the smart contract: is the token transferable between wallets? Can it be destroyed?
Non-Transferable
Removing transferability from a reputation and identity token offers developers tremendous flexibility. Credentials become more meaningful if they can’t simply be sold to someone else. Club membership can become exclusive, or governance tokens can be kept within a tight circle.
Soulbound Tokens?(SBTs) are perhaps the most famous example of nontransferrable tokens, thanks to Vitalik Buterin et al’s paper defining them as the building block of a new, decentralized society. These are tokens that are permanently bound to a specific wallet or individual. They’re intended to prioritize reputation over token ownership, addressing some of the complaints about the?limitations of cryptoeconomics?on governance.
Use cases for SBTs include:
Attestations?are non-transferable tokens that aren’t intended to be permanent or are revokable, and have presented as an alternative to SBTs. The argument is that attestations more closely resemble the way that people actually think of reputation or identity: as something ephemeral and mutable.
Use cases include:
Transferable
Traditional NFTs also have their place in the reputation and identity stack. Profile Pictures (PFPs), for example, denote membership and open the communities around a project such as Bored Ape Yacht Club, offer a potential investment opportunity, and act as a?Veblen Good. Transferability can also allow a badge or NFC, for example, to be used in a composable debt instrument for example. NFTs can also replace transferrable documentation such as real estate titles, or even offer fractional ownership of goods or income streams.
Use cases include:
Burnability
A bit like the difference between a temporary or permanent tattoo: whether or not an NFT can be destroyed impacts its potential use cases. A permanent black mark, for example, has much more serious consequences than one that can be disposed of by its owner. Other possible uses: time-locked burnability — a penalty or boon that can expire, for example, or potentially making a temporary offer.
Building the Future of Finance with Spectral
The pseudonymous nature of the decentralized nature of peer-to-peer transactions limits their use in financial markets, particularly as governments force ever more know-your-customer (KYC) and anti-money laundering (AML) restrictions on payment gateways and processors. Web3 would do well to seize the initiative and create a decentralized identifier that is robust, verifiable, persistent and transparent, composable, equitable, and completely under a user’s control.
Would you like to build with Spectral’s financial primitives and wallet signals? Check out our new developer documentation.
Browse our Developer Docs