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ARCx

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ARCx Credit Introduction
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DeFi Credit Score

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ARCX CREDIT INTRODUCTION




WHAT IS ARCX CREDIT?

ARCx Credit is a decentralized credit market on the Polygon network that offers
dynamic maximum-LTV loans on ETH collateral based on a borrower’s DeFi Credit
Score. The DeFi Credit Score provides a credit risk assessment for individual
wallet addresses based on historical on-chain borrowing activity. Through these
systems, borrowers who use ARCx Credit will build their DeFi Credit Score and
progressively unlock greater capital efficiency on their crypto-collateralized
loans. Our ultimate aim is to build an accurate and efficient reputation-based
credit market in DeFi.
WHY DOES ARCX CREDIT EXIST?

A lender’s effective and efficient evaluation of a counter-party’s credit risk,
and the subsequent pricing of their overall cost of capital, is the core
mechanism at the heart of global credit markets. But despite the important role
that reputation plays in mature financial markets, DeFi lending has historically
relied on indiscriminate mechanisms of risk management, where all borrowers are
treated equally, and given the same terms regardless of the real or historical
credit risk they represent. The lack of an identity and reputation layer in the
DeFi stack has forced the first generation of crypto credit markets to depend on
highly inefficient collateral mechanisms to ensure credit markets remain
solvent. These mechanisms require substantial capital buffers due to the high
volatility of collateral assets. Market participants gain no advantage over time
for being a creditworthy borrower, and are subject to the same onerous
collateral requirements and interest rates as those participants with a poor or
inexistent track record.
Building accurate and efficient reputation-based credit markets would represent
a step-change innovation for the DeFi lending industry, unlocking immense
efficiencies. It would offer material improvements in the cost of capital for
the majority of borrowers who demonstrate effective risk management behaviors.
It would allow the most sound and creditworthy borrowers to increase their
capital efficiency over and above that of other participants, providing a
significant competitive advantage. It would allow lenders to supply liquidity
preferentially based on the credit risk of individual borrowers, leading to the
formation of a credit spread between different risk profiles. The development of
an effective reputation layer supporting DeFi credit represents the next major
frontier for crypto finance.
HOW DOES ARCX CREDIT WORK?

1.
We use the DeFi Credit Score to provide a credit risk assessment for individual
wallet addresses based on historical on-chain borrowing activity. Scores for
each address are calculated and then published on-chain via a gas efficient and
secure oracle infrastructure.
2.
We then offer personalized maximum loan-to-value (LTV) ratios to borrowers based
on their DeFi Credit Score. Borrowers with higher scores will be able to access
more debt with the same collateral level and LTV ratio. Scores are fetched from
our API, and are then verified on-chain via our oracle infrastructure.
3.
We continuously monitor system health and manage a number of unique control
parameters that allow us to refine our risk exposure and profit model over time.
We share reports and analysis on our Community Discord Server.

HOW DO I BUILD MY DEFI CREDIT SCORE?

You can build your DeFi Credit Score by borrowing on ARCx Credit vaults while
avoiding excessive risk exposure or liquidations; or by borrowing on a selection
of third party borrowing platforms and avoiding liquidations relative to the
rest of the market.
This is enforced through three separate rules, which are calculated separately
and then combined to derive the final Score.
1.
Daily Score Reward: Evaluates your borrow usage (i.e. current LTV as a
percentage of max LTV) on ARCx Credit vaults over the prior 120 days relative to
a “responsible” borrower archetype and rewards points according to a “Rewards
Curve” on a daily basis. Currently, the number of points earned each day peaks
when a position is held at 60% borrow usage, and tapers off toward the lower
(more conservative) or higher (more aggressive) ranges of the risk curve (*)
2.
Survival Score Reward Evaluates your ability to avoid liquidations on any
indexed third-party platform relative to the rest of the market, rewarding or
subtracting points proportional to the “liquidation density” on a given day.
Unlike the Daily Score Reward, which looks only at the previous 120 days of
borrowing experience on ARCx Credit, the Survival Score Reward considers the
borrowing experience of a wallet address over its entire lifetime outside of
ARCx Credit. Currently, the maximum number of points a borrower can earn from
the Survival Score Reward is 760.
3.
Liquidation Penalty: Subtracts a fixed number of points for every day in which a
liquidation occurs. The penalty only applies for 120 days, similar to the Daily
Score Reward. After this period, the penalty is removed from the Borrower’s
score..

* Note, as our system evolves, borrowers who have built trust with ARCx Credit
will be able to maintain their high Scores while borrowing at their desired risk
levels. By initially aligning the growth of the Credit Score with borrow usage,
we aim to discourage excessive risk exposure, and by extension, mitigate the
risk to the protocol and to lenders.
HOW DOES MY CREDIT SCORE RELATE TO BORROW USAGE?

The speed at which the Daily Score Reward component of your DeFi Credit Score
grows is directly related to Borrow Usage across your active positions on ARCx.
Borrow Usage represents your current LTV as a percentage of max LTV, which is
determined by the amount of collateral you have deposited and the maximum LTV
you are offered by virtue of your DeFi Credit Score.
Rewards Curve showing borrow usage (%) on the x-axis and the daily score reward
multiplier on the y-axis. Note, both the rewards curve and the speed at which
the Score grows are parameters controlled by Risk.
Position summary card on the app UI showing a Borrower with slow Credit Score
growth
CAN MY DEFI CREDIT SCORE GO DOWN?

Your DeFi Credit Score may lose points in two ways.
Firstly, your score will eventually trend downward if your Daily Score Reward
growth is slower than the rate at which those points are expiring (i.e. 120 days
prior). This will happen if you stop borrowing entirely (and your borrow usage
is 0%), if you borrow in excess of the “critical point” (i.e. your borrow usage
is greater than 90%), or if you are simply borrowing at a less optimal borrow
usage relative to what you were borrowing at 120 days prior.
Secondly, your score will diminish if any of your active positions are
liquidated. Currently, a fixed penalty per liquidation per day is imposed. After
120 days, the penalty is removed and the liquidation event is no longer
considered.

WHAT IS THE “OPTIMAL” BORROW USAGE TO GROW MY CREDIT SCORE?

The current optimal borrow usage to grow your DeFi Credit Score is 60%
The shape of the Rewards Curve, including the optimal borrow usage and the
amount of drop-off left or right of the optimal point, are parameters set by the
Risk function. In our current iteration, the choice of 60% was based on an
analysis of experienced stablecoin borrowers on Compound Finance who use ETH as
collateral (i.e. it represents a position that balances efficiency with risk
exposure given the volatility of ETH)
In this analysis, we found those holding over $1K in debt tend to manage between
50% and 60% of their maximum loan-to-value (LTV). This was further explained
through user research, where we found that experienced borrowers with larger
loans viewed this range as representing a balanced “safety buffer” for their
collateral.

For more information, see Daily Score Reward.
WHICH THIRD-PARTY BORROWING PLATFORMS ARE CURRENTLY INDEXED?

In addition to using borrowing activity from ARCx to construct the DeFi Credit
Score, we also index data from third-party platforms (e.g. Aave and Compound).
For a list of third-party borrowing platforms currently indexed, see Data
Sources.
The process of indexing a third-party platform takes time, but we are constantly
adding more. If you would like us to start indexing a particular platform or
protocol, please let us know by joining our Discord and speaking with our team.
HOW DO I BORROW ON ARCX CREDIT?

Note, ARCx Credit is currently in Closed Beta. To join the waitlist, please
visit https://arcx.money and fill out the waitlist form.
In order to interact with ARCx Credit, you will first need to deposit collateral
into one of our vaults (e.g. WETH-A). After depositing, you will be allowed to
borrow up to your maximum loan-to-value (LTV) ratio. In order to maximize the
speed at which your DeFi Credit Score grows, you can choose to borrow at the
“optimal” Borrow Usage level. Once a borrow position is active, you can then
view and manage your position over time, including depositing, borrowing,
repaying, or withdrawing. Finally, since your DeFi Credit Score grows over time,
you can revisit the app to see how your improved Score corresponds to a higher
maximum LTV.
HOW DO I UNLOCK BETTER CAPITAL EFFICIENCY?

A user who grows their DeFi Credit Score through responsible borrowing will
unlock greater capital efficiency from their collateralized crypto assets within
ARCx vaults. This is primarily achieved by mapping the DeFi Credit Score (a
value between 0 and 999) with a range of maximum LTV ratios for each vault.
To support this, we have implemented a three-tiered vault design, with each
collateral asset having three distinct vault options distinguished by the range
of max LTVs offered (”capital efficiency”), the minimum Score required to access
the vault (”score threshold”), and the maximum amount of debt a borrower can
access (”credit limit”).
Borrow vaults table showing the score threshold and maximum LTV ratio offered
for each vault
Capital efficiency describes the range of max LTV ratios that the vault offers
depending on the user’s DeFi Credit Score. For example, a borrower with a score
of 0 will have their position in the WETH-A vault liquidated at a max-LTV of
80%, while a borrower with a score of 999 will be liquidated in the same vault
at a max-LTV of 90%. Because the DeFi Credit Score changes daily, so too will a
borrower’s maximum LTV offered across different vaults. Additionally, while the
“optimal” borrow usage for growing the DeFi Credit Score stays constant across
vaults, the specific LTV that this borrow usage represents increases in higher
tiered vaults.
Score thresholds prevent access to higher-tiered (i.e. more capital efficient)
vaults until the borrower achieves the minimum DeFi Credit Score required. By
default, everyone has access to the “A” vault, as it has a score threshold of 0.
Vaults “B” and “C” offer comparatively higher maximum LTV ratios, and are gated
to lower risk borrowers who achieve Credit Scores above the thresholds set.
Should a borrower’s Score fall below the threshold, they will be unable to
borrow more until their score returns to the required level.
Credit limits create a ceiling to the amount of debt that an individual can
borrow from a specific vault. Rather than allowing a user to borrow an unlimited
amount, the credit limit provides a way to limit the quantum of losses born
through unprofitable liquidations, particularly for higher tiered vaults. To
more explicitly tie borrower behavior with the amount of debt we feel
comfortable extending, credit limits for an individual vault can be determined
dynamically based on the amount a user has borrowed in other vaults.

The three-tiered vault design was selected to balance the user experience
requirement of progressively and frictionlessly unlocking greater capital
efficiency while borrowing, with the financial and risk requirement of
minimizing losses through unprofitable liquidations. The design provides ARCx
Credit with the ability to fine-tune a variety of risk controls at the
individual vault-level (such as max-LTV ranges, score thresholds, and credit
limits), helping to maximize net profit across our loan book. Additionally,
since Lenders are able to supply funds to Borrowers with specific Score ranges
(e.g. over 500 only), we create the conditions necessary for the market to
determine a true credit spread between different Borrowers based on the DeFi
Credit Score.
For more information, see profit model and vault design and credit limits.
WHAT COSTS ARE ASSOCIATED WITH BORROWING ON ARCX CREDIT?

ARCx Credit charges borrowers an interest rate on outstanding loans, a borrow
initiation fee, and a penalty for liquidations.
For more information, see fee structure.
HOW FREQUENTLY IS MY DEFI CREDIT SCORE UPDATED?

The DeFi Credit Score is updated on-chain via our merkle root oracle
infrastructure every Epoch (currently set at 24 hours). But before Scores become
active on the blockchain, they must first spend 1 epoch on the
SapphirePassportScores contract as the “upcoming Merkle root”. This step of
having a public “upcoming root” provides an additional layer of security and
transparency, allowing for anyone to externally validate both the “current root”
and the “upcoming root”. When a new root is thus published, the “upcoming root”
becomes the “current root”, and the new root takes its turn as the “upcoming
root”. This delay will be shortened over time.
For more information, see infrastructure.
HOW ARE RISKS MANAGED?

The ARCx Credit protocol has been designed to avoid excessive exposure to any
single party, and to rely on empirical data and rational incentives instead of
trust.
The DeFi Credit Score is based on real statistical indicators of credit risk,
and contains no subjective analysis of a debtor’s profile based on their
identity. Trusting a brand name fund, trading desk or other market participant
has proven to be extremely hazardous, subject to significant tail risks and the
possibility of fraud. We believe that trusting on-chain data levels the playing
field for market participants and will prove itself as a more reliable indicator
for credit risk.
The rules of the DeFi Credit Score are transparent and easy to understand.
Instead of building a “black box” machine learning model that ingests hundreds
of data points to return a result, we enable lenders to do their own research to
understand the counter-party risk of our users. Through explaining the rules
clearly to both parties and publishing updated scores on-chain each day, we are
providing the tools for lenders to evaluate the performance of our risk modeling
more than other credit scores are willing or able to do. Ultimately the market
determines the probative value of our scoring, and will price their liquidity
accordingly.
ARCx Credit and DeFi Credit Score system health KPIs are monitored and publicly
available to track for lenders, borrowers and investors alike. As discussed
below, we control a number of parameters that influence how much risk we
introduce into the system. Making this data and the process by which different
parameters are updated more transparent is critical to building trust with
market participants.
The three-tiered vault design and the addition of a dynamic credit limit based
on previous borrowing actively prevent exploitation and debt concentration risk
for the protocol. If a user deposits $1 worth of ETH, and borrows perfectly
until they have a Score of 999, they will not then be able to borrow a large sum
of money in Vault C.

Besides this, ARCx Credit is also exposed to smart contract risk (i.e. the risk
that a bug within the protocol code can be exploited). ARCx Credit is a new
protocol that has been in development for over 12 months. Our contracts are
scheduled to be audited by Trail of Bits in October 2022.
HOW DO WE MANAGE PROFITABILITY?

Protocol net profit is equal to the sum of fees generated by Borrowers (through
interest, borrow fees and liquidations) minus the losses they incur to the
protocol (through unprofitable liquidations). Borrowers in the highest tiered
vaults pose the greatest risk to profitability, since liquidations there may
lead to the accumulation of toxic debt in the system (i.e. debt which is not
recoverable by liquidating the underlying collateral).
To manage and optimize profitability, the ARCx Credit system provides a number
of unique control parameters. Through understanding, monitoring and fine-tuning
these parameters, ARCx Credit will deliver sustainable net profit across its
loan book.
Control parameter
Description
Maximum LTV offered in each vault
The primary way in which ARCx Credit exposes itself and its lenders to risk of
unprofitable liquidations. Based on our analysis, we are comfortable launching
with 100% max-LTV on ETH collateral for borrowers with a DeFi Credit Score of
999.
Fees charged to borrowers
The fees we generate through interest rates, loan instantiations and
liquidations. Fees are earned from borrowers as they build their DeFi Credit
Score, and may be used to cover losses born from unprofitable liquidations. At
present, the interest rate is set by ARCx Credit, but in future this will be set
dynamically based on supply / demand.
Score impact for borrowing (or the time required to improve your DeFi Credit
Score)
The length of time required for a borrower to build their DeFi Credit Score will
influence the amount of fees we generate from an individual borrower before a
liquidation might result in the accumulation of toxic debt
Score impact for liquidations
The impact on a borrower’s DeFi Credit Score in the event of a liquidation. The
impact should be configured such that it appropriately disincentivize
liquidations, primarily by the opportunity cost of losing access to improved
capital efficiency and the time required to rebuild the Score.
Shape and configuration of the Rewards Curve
The shape and configuration of the Rewards Curve that determines the Daily Score
Reward. This includes defining the "optimal" borrow usage point (influencing
where borrowers sit to grow their Scores), and the shape of the curve itself
(e.g. providing more flexibility to borrowers in determining their own optimal
positions without unnecessarily penalizing them with a lower Daily Score Reward)
Credit limit imposed on each vault
The maximum amount of debt a borrower can access from a given vault, regardless
of their collateral deposited. This prevents debt concentration risk in higher
tiered vaults, and limits the quantum of losses on liquidation. Credit limits
may be static (i.e. the same for all borrowers) or dynamic (i.e. based on how
much debt a borrower has used in other vaults).

HOW DO WE INCENTIVIZE RESPONSIBLE BORROWING?

The design of ARCx Credit and the DeFi Credit Score aim to incentivize
responsible borrowing behavior. This is based on two unique factors:
1.
The time and effort required to build to a high DeFi Credit Score (which would
be a sunk cost if a wallet is abandoned after liquidation)
2.
The quantifiable benefit that a borrower receives from continued access to
higher-tiered vaults (i.e. the capital efficiency gained)

Since the growth of the DeFi Credit Score is explicitly tied to responsible
borrowing behavior, users who want access to improved capital efficiency will be
incentivized to borrow responsibly. Conversely, if the expected benefits of
continued access to improved capital efficiency exceed the penalty for
liquidation and the time and effort required to rebuild a Score, then borrowers
will be incentivized to avoid liquidation.
HOW DO I JOIN THE CLOSED BETA?

To ensure the system works as expected and to allow us time to refine our risk
parameters, we have created a waitlist which you can join now. We will be
whitelisting addresses each week before a wider release following our audit with
Trail of Bits in mid-October 2022.
To get started:
1.
Visit https://arcx.money
2.
Add your email address and click “join waitlist”
3.
Fill in our optional research survey (this just helps us improve our product)
4.
We’ll send you an email when your address is whitelisted

IS THERE A TOKEN FOR ARCX?

Yes. The ARCx Governance Token is the primary governance mechanism for the ARCx
protocol. The token is used to vote and decide on the outcome of ARCx
Improvement Proposals (AIPs).
There is a ETH-paired liquidity pool on Uniswap (on Ethereum), which can be
accessed here.
For more information, see ARCX Token.
WHO IS BEHIND ARCX?

We are a team of product builders who believe that on-chain reputation will
transform decentralized economies for the better. Come join us on Discord to
learn more.

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DeFi Credit Score

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On this page
What is ARCx Credit?
Why does ARCx Credit exist?
How does ARCx Credit work?
How do I build my DeFi Credit Score?
How does my credit score relate to borrow usage?
Can my DeFi Credit Score go down?
What is the “optimal” borrow usage to grow my credit score?
Which third-party borrowing platforms are currently indexed?
How do I borrow on ARCx Credit?
How do I unlock better capital efficiency?
What costs are associated with borrowing on ARCx Credit?
How frequently is my DeFi Credit Score updated?
How are risks managed?
How do we manage profitability?
How do we incentivize responsible borrowing?
How do I join the Closed Beta?
Is there a token for ARCx?
Who is behind ARCx?