Definition ∞ A Credit Risk Algorithm is a computational model employed to assess the likelihood of a borrower failing to meet their financial obligations within a lending system. In decentralized finance, these algorithms analyze on-chain transaction history, collateral ratios, and other protocol-specific data to ascertain creditworthiness. The output aids automated lending protocols in establishing interest rates and collateral requirements for digital asset loans.
Context ∞ The deployment of credit risk algorithms in DeFi represents a critical area for expanding access to uncollateralized or undercollateralized lending. The current discussion revolves around improving the accuracy and fairness of these models, particularly concerning privacy-preserving data utilization. Future advancements seek to incorporate off-chain data securely and establish industry standards for transparent and auditable risk assessments.
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