Spectral Finance

Crypto Deep Dive - 07/08/2021

Marcus Kelly avatar
Written by Marcus Kelly
Updated over a week ago

Traditional money market protocols in DeFi require overcollateralization when taking out a loan which has proved to be one of the largest sources of capital inefficiency in the DeFi ecosystem. Since borrowers are anonymous and the protocol cannot determine what the credit will be used for, overcollateralization is required to ensure lenders their assets will be repaid with interest. To solve this problem, an on-chain credit scoring system is required that determines an Ethereum’s account credit worthiness based on their transaction history with money market protocols. Spectral Finance aims to provide MACRO scores for Ethereum addresses and to democratize credit scoring methodologies to produce a robust and accurate model for DeFi users.

Money markets & Overcollateralization

Money markets in DeFi allow any user to become a lender and allow anyone to borrow whilst setting interest rates algorithmically based on the utilisation rate of the market. However, since both lenders and borrowers are pseudonymous, precaution must be taken to ensure the risk is mitigated to ensure lenders receive allotted interest over a given period of time in case the borrower defaults on their loan. The solution to this is overcollateralization.

Overcollateralization is defined as the provision of collateral that is worth more than enough to cover potential losses in case of default. It is used to offset risk which is particularly important in DeFi money market protocols where the application of credit and identity of the borrower are unknown. Although this offsets risk for the lenders, it is particularly capital inefficient for borrowers meaning they are required to lock up more capital than willingly in order to access credit. There are two ways to solve this problem:

On-chain Credit Scoring: Producing a credit score for an address based on their transaction history with money market protocols in DeFi such as Aave and Compound.

Protocol-to-Protocol Lending: Lending assets directly to protocols which removes the pseudonymous nature of lending and defines exactly what the credit is going to be used for. Popular solution has been developed by Cream Finance called the Iron bank.

Spectral MACRO Scores

The MACRO Score stands for the Multi-Asset Credit Risk Oracle which represents an Ethereum’s accounts credit standing in DeFi. The scoring system ranges from 350 to 850 and the higher the MACRO score the better an individual’s credit standing is in the DeFi ecosystem. For example, if an account has a prior history of liquidation when taking out a loan from Aave or Compound then the resulting MACRO score will be lower.

Spectral Finance using advanced statistical methodologies such as novel machine learning algorithms to evaluate the quantitative on-chain data and historical transactions with multiple DeFi protocols to calculate the MACRO score without bias. Since the Ethereum blockchain is an open ledger, we can enquire about the transaction history of any address and observe interactions with specific protocols. These data points applied with statistical analysis allow the calculation of a unique credit score associated with an address. The following data is used to generate a credit score:

Transaction History: The history of transactions associated with a certain address on the Ethereum blockchain that defines sender, recipient, value and transaction data.

Liquidation History: Managing the health score of a loan in DeFi and if the health score drops below a certain level the position is liquidated. Indicates risk appetite of an address plus indicative of speculative behavior if managed incorrectly.

Debt & Repayments: Maintaining a good track record of repaying outstanding debt and not having multiple loans open simultaneously for long periods of time.

Credit Mix: Analyzing addresses interaction with other protocols within the Defi ecosystem to determine how assets are deployed and the knowledge of the system as a whole.

Length of Credit History: The longer the history of credit the more creditworthy an individual becomes assuming loans were paid off consistently throughout that period.

Non-Fungible Credit

Spectral Finance aims to take the credit scoring process from central intermediaries such as reporting agencies and return the credit score back to the individual. Therefore, a Non-Fungible Credit ERC721 token is given to the user representing their on-chain transaction history in the form of the MACRO score. However, there is a threat when it comes to this wallet infrastructure. The threat being any individual can simply mint the NFC and sell their private key to anyone who wants access to an account with a high MACRO score. Additionally, albeit DeFi is currently separate from legacy finance there could be regulatory requirements for Spectral Finance if the DeFi ecosystem becomes compatible with legacy.

Another point to be noted here is that many individuals own multiple wallets in order to minimize the threat of losing a private key or anything related to wallet security to protect their funds. Some even use multi signature wallets that require multiple accounts to sign a transaction before it is even submitted to the blockchain for verification and confirmation. Hence, Spectral Finance allows you to ‘build-a-bundle’ which is essentially aggregating multiple wallet addresses to prevent the fragmentation of transaction history.

The MACRO score for each wallet is calculated then an aggregated score is provided between all wallets. Once the NFC is minted then the bundle of wallets is permanent meaning you cannot add or remove another wallet in the calculation of the MACRO score.

Distributed Credit Risk Modeling

First and foremost the approach Spectral Finance has taken in credit score modelling is fully open and transparent. But what if we could open the credit risk modelling process to the collective intelligence of a DAO? Credit scores can be democratized allowing any participant to submit a proposal for modifying or adding a new methodology to the credit scoring process which means the accuracy continually evolves over time.

Credit scores from different proposed models are aggregated in an attempt to produce a more robust credit score. Each model is required to have proof of integrity which performs with high accuracy and ensures there is no malicious attempt to alter MACRO scores.


Spectral Finance raised $600k in a round led by Galaxy Digital and numerous other funds such as DeFi Alliance, Rarestone Capital, Maven11 and New Form Capital. This was the first round to be raised by the protocol and is expected to raise another round some time in the future.


Spectral Finance is focusing on the overcollateralization problem plaguing DeFi money markets to improve the capital efficiency of the DeFi lending and borrowing markets. They are focusing on an on-chain credit score using transaction history to produce a MACRO score for individual or aggregated wallets. Democratizing the modelling of such a calculation allows for a more robust and ever evolving credit scoring system. The Non-Fungible Credit tokens provide the solution to a unique credit score in DeFi. Spectral has enormous growth potential based on the total value locked in money market protocols and every single individual looking for a lower collateralization ratio to free up capital to be used in other means in DeFi.

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