On-chain reputation: Starting from decentralized identity, building a trust mechanism for the Web3 world

Original article: "7 O'Clock Capital: On-chain reputation - a credit mechanism for quantifying on-chain behavior in Web3"
Author: Thomas
Introduction
If laws, systems and rules can keep society functioning normally in numerous interpersonal interactions, then the credit system helps society develop towards a healthy stage with clear rewards and punishments.
In the credit system, different credit sections can be divided according to credit behaviors in different fields, such as government integrity, business integrity, social integrity, judicial integrity, etc. In financial activities, credit is particularly important. Some countries have even established financial credit scores specifically for credit to evaluate the credit limit, grade, etc. of individuals or organizations.
In the crypto-finance industry, smart contracts have enabled trustless transfers and transactions. The current Web3 is also mainly centered around financialization and transferable assets. However, many subjective crypto behaviors, such as establishing online personalities, unsecured loans, etc., are implemented and continuously accumulated based on non-transferable social relationships. At this point, it is very important to build a reputation system in the crypto world to judge false behaviors, malicious behaviors, and contribution behaviors.
Table of Contents On-chain reputation in the crypto world Classification and examples of on-chain reputation projects The future of crypto reputation systems 1. On-chain reputation in the crypto world
The emergence of smart contracts provides trustless transaction guarantees. Based on this, as Web3 application scenarios become more diverse, more interactive activities have given rise to decentralized identities (DIDs), such as Web3 domain names, which allow users to travel between various applications through domain names without having to log in repeatedly.
After the domain name appears, we can query all its on-chain data, including transfers, purchases, transactions, interactions, etc. Secondly, the user's activities in various Web3 social applications also leave evidence. Therefore, all on-chain activity data corresponding to a domain name will truly reflect the characteristics of this user, such as the size of funds, the degree of activity in various DAPPs, etc.
▍▶(I) The importance of building on-chain reputation
If decentralized identity is the future, then the behavior of wallets or domain names will be the basis of online personality and reputation. On-chain reputation will play an important role in quickly identifying the credit and characteristics of Web3 identities. It can be summarized as follows:
1. Implementing on-chain identity for Web3
At present, the on-chain identity we are talking about is just a wallet address or domain name composed of a string of letters or numbers. In essence, it is just a kind of identity information, just like a person's ID card information in Web2. In real life, one identity information can perform different social behaviors, thus corresponding to different social roles and generating different social relationships. The social network formed by multiple social roles is the identity.
In Web3, a combination of multiple on-chain roles formed by an address or domain name and the multiple social behaviors it generates can be considered a true on-chain identity. For example, if an address uses Uniswap multiple times, this behavior can be quantified through the on-chain reputation system, and then the role of "Uniswap enthusiast" or "DEX enthusiast" will be formed and added to the social relationship of the corresponding address for others to quickly identify.
2. Ensure the uniqueness of DID
In Web2, our ID cards and passports can only correspond to one real person. If ID cards and passports are forged, then one real person will also correspond to multiple different identities. When it is necessary to identify the authenticity, it is necessary to verify it based on their life trajectory, behavior, and social relationships, because social relationships require the accumulation of personal history.
In Web3, the user's on-chain identity is DID. There is no falsehood, because a real person can create multiple addresses and have different domain names. When there is no on-chain reputation system, to determine whether these addresses are owned by the same person, it is necessary to check the IP address, the similarity of historical on-chain behavior, the correlation between addresses, etc., which is extremely costly and inefficient. The existence of the on-chain reputation system quantifies and classifies the historical behavior corresponding to the DID into a system and displays it in a very clear form. While proving the uniqueness of the DID, it will also improve the efficiency of resolution.
This also shows that the real individual corresponding to the DID also needs to accumulate on-chain behavior over a long period of time in order to gain the corresponding reputation.
3. Provide a reliable trust system
In Web3, decentralized identity has the characteristic of anonymity, and users have to prove that their behavior is not malicious. At this time, the emergence of on-chain reputation can provide proof of user behavior while protecting privacy.
In addition, there are many types of blockchain projects. Users can establish a reputation in one or more sections in a targeted manner to clearly prove their talents or contributions in these areas, which is more fair. At the same time, the lack of reputation in a section can be remedied through other behaviors and recorded on the chain, which also improves credibility to a certain extent.
For project owners who want to acquire more real users and prevent witch attacks, they can also check the reputation of the address through the on-chain reputation system, thereby reducing robot addresses and distributing rewards to real contributing users.
4. Facilitates user identification and precision marketing
The on-chain reputation system forms various labels for users based on their various behaviors, such as NFT enthusiasts, traders, etc., which to some extent realizes the user portrait of Web3. One of the biggest functions of user portraits is the precise matching and marketing of market supply and demand, which improves the circulation efficiency and activity of the ecosystem.
For example, in lending activities, suppliers can use on-chain reputation to quickly call up the credit index of user-related categories to evaluate the volume of lent funds. If there is no clear on-chain reputation system, it is necessary to analyze most of the user's on-chain behavior to get the result.
For various projects and applications, it can achieve accurate identification of loyal users and improve the matching degree of marketing. For example, a music DAPP can identify the real participating users and long-term accompanying users of the project through the on-chain reputation system, and can also find users who are very active in the music field, thereby achieving high matching marketing.
In general, on-chain reputation systems can play a positive role in Web3 and the entire crypto world.
▍▶(II) Problems faced in building a reputation system on the current chain
It is not easy to establish a relatively complete reputation system, and there are many difficulties in the implementation process.
1. It takes a short time for users to build reputation
The on-chain reputation system is a quantitative assessment based on the user's historical on-chain behavior. Therefore, if a user wants to gain a good reputation, he needs to accumulate credit over a long period of time. However, for new users entering the crypto world or new users entering a certain field, the role that the on-chain credit system can play is very limited. Therefore, whether the credit system standard in the crypto world can have standards other than time is also worth considering by the industry.
2. Process and classify large amounts of complex data
On the chain, a huge number of operations are recorded every second. So how does the reputation system classify these behaviors into categories such as transactions, mint NFTs, and third-party DAPP interactions, and then display them in the address or domain name corresponding to each identity? This is a very complex process. In addition, in the third-party interaction category, if you want to distinguish other categories of behaviors such as social networking and games, strong technical support is also required.
3. The credibility of the entity that builds the reputation on the chain in the crypto world
In web2, the social credit system or financial credit is issued and supervised by the state or financial institutions, and has a high enough authority. Therefore, society will recognize the reputation system and data established by it.
In Web3, it is more advantageous for entities with certain industry authority or high recognition to establish a reputation system, thereby aggregating more applications and forming a certain reputation standard. Alternatively, the subject of the reputation system has sufficient capabilities to cooperate with enough projects to reach a consensus on the reputation standard, which is also possible.
4. The reputation systems between public chain ecosystems are not interoperable
At present, there are more and more ecosystems centered on public chains. Although there are ways to connect assets through cross-chain, the interoperability between public chains is extremely limited. It can also be expected that it is easier to build a reputation system for a single ecosystem than a reputation system for the entire crypto world. However, improving the interoperability between public chain ecosystems is also a key issue to be solved in the future, so the reputation system will also develop in this direction.
2. Classification and Examples of On-Chain Reputation Projects
In his paper "Decentralized Society: Finding the Soul of Web3", Vitalik Buterin said that the current Web3 is almost centered around "financialization and transferable assets", while a decentralized society needs to rely more on "non-transferable assets" to establish trust relationships and weave social networks.
He then proposed "Soulbound Token", or SBT. "Soul" is synonymous with accounts, wallets, etc., and can hold SBT, which is non-transferable, potentially revocable, and initially public. Future privacy SBT use cases are also feasible. SBT can track the social relationships and experiences of wallet accounts.
This also provides great inspiration for the establishment of an on-chain reputation system. Therefore, many projects also evaluate the credibility of identities from the perspective of SBT.
7 O'Clock Capital has sorted out the main projects in the current crypto market that build on-chain reputation. According to different use cases and implementation methods, they can basically be divided into the following categories:
▍▶(I) Data/behavior tagging
This category is to create user profiles based on the transaction trends and on-chain behaviors of the addresses, and label them accordingly for viewing. The movements of these addresses will continue to be tracked to form data analysis. The most typical one is the blockchain data analysis and tracking platform Nansen.
https://www.nansen.ai/
Nansen enhances the signal of real-time on-chain data by marking crypto wallets. Currently, Nansen has marked hundreds of millions of wallets, including public addresses of Vitalik Buterin and some funds, as well as many anonymous addresses with huge capital volumes. 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 functions include checking the status and movement of funds at specific addresses, the market conditions and trading masters of NFT and DEFI, the wallet holding addresses and major holders of specific tokens, etc. The most distinctive one is “Smart Money”, which uses the transaction profitability of the address to assign different labels, such as “Airdrop Expert” and “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 of 30 days after the distribution begins), it will be marked. Such addresses are also divided into those that scoop up airdrops or interact with selected protocols, and users need to pay attention to the second category, so as to track these smart addresses and find profit opportunities.
The wallet labels are implemented through various methods such as algorithms, team analysis and research, and community provision. The data is complex and the users are basically traders and institutions with certain experience, and paid viewing is implemented.
▍▶(II) DeFi Credit Score
Such projects score addresses by analyzing and processing the historical transaction behaviors of addresses on the chain, thereby providing them with credit support such as lending. Representative projects include:
ARCx.money
https://arcx.money/
ARCx is a decentralized scoring protocol that provides support for on-chain identity and credit score-based lending. Credit scores are determined by analyzing the historical activity of user addresses. ARCx also built a machine learning model to backtest the classification of liquidated or liquidated positions to reflect the correlation between on-chain activity and credit risk.
The better the borrower's historical transaction credit (for example, no history of liquidation), the higher the score and the higher the loan-to-value ratio. At present, ARCx is a project focusing on DeFi credit scoring, which can make lending no longer indiscriminate and reduce related risks to a certain extent.
Spectral
https://www.spectral.finance/
Spectral is a programmable, open on-chain reputation scoring system that allows users to obtain credit scores based on their on-chain interactions and supports any DAPP integration. Credit scores are used to assess risk, thereby assisting the utilization of on-chain capital and helping users achieve fair loans.
Its on-chain scoring is achieved through MACRO (Multi-Asset Credit Risk Oracle), which is supported by a machine learning algorithm model created based on the DeFi data set, and can update the latest measurement indicators in real time according to the development of on-chain applications. In addition to DeFi, Spectral is also collecting other data sources, such as NFT, and is trying to expand the scoring system to chains other than Ethereum.
MACRO scores not only support users to obtain scores using a single wallet, but also support a user to generate scores using multiple wallet addresses and comprehensive historical data. The Spectral application automatically retrieves all DeFi and non-DeFi related transactions associated with one or more wallets, and generates an on-chain credit score using a machine algorithm.
▍▶(III) Badge/Certification
Projects in this category show their reputation in a certain aspect by issuing specific badges or certificates to valid addresses. Implementation forms include POAP, SBT, and third-party badge NFTs. Some of these certificates have the property of being non-transferable, which ensures that specific actions belong to specific addresses and prevents the construction of false reputations through buying, selling and transferring.
POAP
https://poap.xyz/
POAP, or Proof-Of-Attendance Protocol, records and commemorates the occurrence of specific events by distributing encrypted badges, thereby generating attendance credentials.
POAP was originally created at the ETHDenver conference in 2019 to reward hackers who attended and participated in hackathon events. In October 2020, POAP migrated to the Ethereum sidechain xDai because of its faster speed and lower transaction costs. This allows 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 to record their experiences in the crypto world, thus forming identity credentials with real proof properties.
Current applications include: proof of attendance at online and offline encrypted events, milestone records in blockchain games, community contribution rewards, and some ceremony commemorations outside the blockchain field. POAP has achieved a combination of real life and virtual life to a certain extent.
Gitcoin Passport
https://passport.gitcoin.co/#/
Gitcoin Passport is a Web3 identity verification aggregator launched in Gitcoin 2.0 to prevent Sybil attacks. Users can collect "stamps" from different identity verifiers in Web2 and Web3. Stamps are verifiable credentials, and Passport aggregates multiple stamps and distributes trust. After dApps are integrated with Passport, they can verify their identities through custom algorithms, and they can also set different stamp weights in the algorithm according to different preferences.
The authentication projects or platforms currently aggregated by Gitcoin Passport include:
working process:
Users link their wallets and authenticate themselves on each platform on the Passport page, thereby generating corresponding badges. Any on-chain project can easily implement digital identity authentication through the Passport SDK, which can not only determine whether the user has used multiple wallets in the system, but also verify the user's membership in different communities and experience in participating in different projects. This provides a new way to view online identity, identifying users while building online digital reputation.
Advantage:
1. Aggregates multiple Web2 and Web3 platforms with high weight, and realizes data composability and interoperability clearly and conveniently;
2. Provides a channel for project owners to verify user identities and effectively prevent witch attacks;
3. While protecting user privacy, verify identity through custom algorithms and provide verifiable identity credentials.
Noox
https://noox.world/
Noox is a platform for Web3 users to mint badges based on on-chain behavior to prove their achievements. Applications or community planners can program arbitrary rules into badges, such as number of interactions, amount, etc. After users discover relevant activities through the Noox platform, they can link their wallets and mint them if they meet the conditions.
These badges will be soulbound NFTs that cannot be transferred, allowing anyone to mark on-chain interactions as attributes or achievements. Users can also use this to showcase their interests and achievements.
Noox Badge is a non-transferable NFT on the platform’s on-chain achievements. It uses plain text, graphics, and images to visualize what the user has “done” on the blockchain, such as trading on OpenSea, providing liquidity for Uniswawp, and donating to Gitcoin.
The project launched a closed beta product with Web3 profile and badge browser features in early May.
▍▶(IV) Marketing and promotion tools
As airdrops gradually become one of the means to attract a large number of users, various single-person batch account brushing, robot false operations and other phenomena are frequent. In order to prevent witch attacks and false operations, the project party needs to spend time and manpower to distinguish, but the effect is not good. At this time, a kind of tool that helps users screen real users has appeared in the market. Users can obtain specific badge NFTs by performing tasks, binding Twitter, Discord and other accounts, and completing specific interactions. The cost of completing tasks has increased, which has also limited some fake accounts to a certain extent.
Through this tool platform, project parties can not only achieve marketing goals, but also obtain most of the real user data.
galge
https://galxe.com/
Launched by Web3 infrastructure service provider Galxe (formerly Project Galaxy), it collects credential data through on-chain interaction and off-chain integration of Twitter, Github and other multiple data sources to manage the network. DAPP can use credential data to calculate credit scores, find target audiences, reward contributing communities, etc.; Web3 developers can use credential data to build better products and communities.
product
Galaxy ID: Galaxy ID is generated after the user links the wallet, which represents the user's multi-chain/multi-wallet identity in Web3. Based on the user's historical behavior, labels such as "Uniswap V3 trader" and "OpenSea trader" are automatically displayed in the ID. Users can also use Galaxy ID to display the credentials collected in the Web3 world, such as NFT badges, to show their achievements.
Galxe OAT: It is a lightweight solution for event organizers and community managers to easily build and distribute NFT badge events and reward their community members using Galxe's NFT infrastructure and on-chain credential data network. Simply put, project owners can create their own pages on Galxe and submit parameters and badge designs. After users complete relevant tasks, they can mint badges without gas fees.
Currently, the official display supports 8 public chain ecosystems, there are already thousands of partners, and many casting activities have been launched one after another.
Guild
https://guild.xyz/explorer
Guild is a gated application based on DID. Through the Guid platform, you can set the entry conditions for Discord or Telegram, such as which tokens and NFTs you hold. There are currently more than 3,000 gated tasks based on many projects. The latest role task of the well-known Layer2 Arbitrum is carried out through this platform.
Users can complete tasks published by the project and confirm their roles after meeting the requirements. This method can prevent robots from inflating the volume to a certain extent, and the project can also screen loyal users and reward them.
▍▶(V) Privacy Proof
On-chain reputation proves the degree of credit to others in various forms, including a lot of public information of users. If this data is used by improper means, users will also suffer certain losses. Therefore, some projects build a credible reputation from the perspective of protecting privacy.
Earthquake
https://app.sismo.io/
Sismo is a modular proof protocol on Polygon that focuses on decentralization, privacy, and usability, issuing proofs in the form of non-transferable badges. The feature is that zero-knowledge proofs are used to issue badges to users' other accounts (such as ENS and twitter or github) to build their Ethereum profiles, and users can aggregate their reputations into public profiles while keeping it confidential.
Based on user/wallet interaction, Sismo allows users to apply for ZK certification. Using Sismo's SDK, developers can now use Sismo's certification to lock in user groups. It is currently in the Alpha testing phase.
Application scenarios include: anonymous proof of holding NFT, without revealing which BAYC is held and which Ethereum account (and its complete history) to prove ownership. And access to the holder community through ZK badges. In addition, in DeFi, ZK badges can be used to obtain loans at better borrowing rates without revealing specific transaction data.
▍▶(VI) Identity and 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 reputation, similar to the identity resume of Web3, which includes various activities and social networks participated in by the corresponding identity.
Link3
https://link3.to/dashboard/explore
Link3 is a Web3 social network application developed by CyberConnect, which can be understood as a verifiable DID. Through the platform, users can collect their on-chain and off-chain data into one page, which is roughly equivalent to Linktree + Twitter feed. For example, an organization's official website, team, Mirror, Twitter, DC, Web3 certificate, NFT gallery, etc.
Trust is established through verifiable connections, and identity is enriched through relevant experiences and backgrounds. Similar to the nature of showing oneself in Web2 by following others and publishing content, the organizational relationships, asset certificates, and activity participation data on the chain will constitute the user's rich Web3 identity.
In summary, verifying and displaying the credibility of identity is driven by the development of Web3, DID and SocialFi. Users are no longer satisfied with having a decentralized identity, but are more pursuing the importance, taste, reputation, status, etc. of their identity. These need to be cashed out through on-chain behavior and on-chain social interaction.
Most of those who want to improve their identity credibility by completing tasks are attracted by the benefits of project airdrops. Before the emergence of these certification projects, any project that wanted to send airdrops to users could not avoid problems such as witch attacks and false volume, resulting in unfair and uneven distribution of users' rights and interests.
However, the on-chain reputation has not yet formed a system, and is decentralized, single-functional, and subject to cross-chain limitations. Its development potential remains to be seen.
3. The Future of Crypto Reputation Systems
According to the current development status and characteristics of the encrypted reputation system, combined with the future trend of Web3, its future development direction can be summarized as follows:
1. Open data standards
The quantification of on-chain reputation requires certain standards and public access, such as who sets the standard, whether it is a technical decision or social recognition, so that it can form a certain authority and credibility. In addition, the management of reputation data also needs to be open and transparent, such as the distinction between the display of proof of contribution and the display of transaction records.
2. Diversified applications
The current reputation application is extremely limited, and is only used in some scenarios such as DeFi credit lending and airdrop rewards. In the future, the development of reputation system applications should be diversified, and all aspects of Web3 decentralized society, whether it needs to be linked to Web2 or purely on-chain, multi-party applications can not only improve circulation efficiency, but also improve the overall social credit.
3. Clear and comprehensive on-chain social graph
One of the focuses in Web3 is decentralized social networking. The reputation system can help users build a more comprehensive resume, and the on-chain social graph is clearer and more visible. Users can demonstrate their abilities and loyalty to NFT, protocols, ecology, etc. through various certifications, thereby presenting their reputation in the entire social graph, which is also conducive to users carrying out a series of other activities.
4. Position user portraits and conduct precision marketing
Even decentralized identities in Web3 have different roles, such as traders, NFT enthusiasts, etc. One of the developments of the on-chain reputation system is to classify the data of identity roles and accurately locate user portraits, which can be more convenient when it is necessary to check the reputation of a user in a specific field. This also facilitates marketing and marketing, and obtains more accurate user groups at a lower cost.
5. Privacy protection
On-chain reputation is built based on credibility, but there are also users who do not want to display all their behavior data, so there is a question of how to protect some of the user's privacy while building on-chain reputation. As mentioned above, Sismo protects privacy. It can make others believe in a certain characteristic of the user without revealing the user's specific behavior or assets. In the future, it may appear that if you want to view a user's specific reputation, you will also need to unlock it under certain conditions.
6. On-chain reputation of multiple objects
So far, the objects of project certification for building on-chain reputation are all crypto users. However, it is not only users who need reputation, but also projects and institutions. This also makes it easier for users to better screen the projects they are interested in in the crypto world and whose information is credible.
Summary: On-chain reputation is spawned by the continuous development of DID and SocialFi, and will play an important role in building rich identity content and social graphs for Web3. However, the current on-chain reputation projects are relatively simple, and have not yet formed a basic architecture. They are only established based on specific market needs. 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.