The DeFi Credit Score is a numeric value (between 0 and 999) that describes the credit risk of an individual address based on their on-chain borrowing activity. The Score is constructed from three main components - the Daily Score Reward, the Survival Score Reward, and the Liquidation Penalty. These three components are combined to derive the final DeFi Credit Score.
The 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.
The Survival Score Reward evaluates a borrower’s 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.
The 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.
Through managing a risk-adjusted position over a period of time while avoiding liquidations, borrowers can unlock greater capital efficiency in DeFi through borrowing on the ARCx Credit.