Talking Proof of Humanity, UBI, and no-collateral loans with Kleros
May 10th, 2022

We recently held a Twitter Spaces session with Federico Ast and Guangmian Kung of Kleros in which we covered an array of spicy topics.

There’s an important reason that we wanted to put this session together: At PWN, we’re putting together a think tank around the topic of solving undercollateralized loans within DeFi. Together with Kleros, we’re inviting a number of players within the space to participate in this initiative. (Stay tuned for more info during the coming weeks on this!)

What does Kleros do?

Kleros is self-described as a decentralised arbitration service for the disputes of the new economy.

As put by Federico, “Kleros is building a decentralised justice system that can resolve claims from different web3 applications, including e-commerce, finance, and also NFTs and content moderation. What we’re building is designed to serve all of the web3 ecosystem.”

Other services provided by Kleros include:

  • Insurance protocol
  • Proof of Humanity: Registries of real humans on the blockchain (more on that below)
  • Curation services for tokens

The Kleros ecosystem lives and breathes through the disputes brought back to the Kleros Court by each of the arbitrable apps integrated with it. Some are developed by the Cooperative Kleros team, but most are external projects plugging into the Kleros products to get arbitration, curation, oracle, or escrow services.

Here’s a high-level view of the complete Kleros ecosystem:

Image credit: Kleros
Image credit: Kleros

Undercollateralised and no-collateral loans

One of the main topics of our Spaces session is a topic that we’ve recently covered on our blog:  undercollateralised and no-collateral loans.

No-collateral loans, on their own, can be a fantastic tool to onboard someone to DeFi.

Referring to his own experience getting started in the DeFi space, Federico said, “The first thing I started thinking about were micro credits. I read a book by Mohammed Yunus, who did this experiment of the Grameen Bank in Bangladesh and making loans to it.”

It’s important to point out that no-collateral loans, which are essentially networks of trust between people who help each other (for example, when you ask your grandmother for money to buy a house) still use reputation as a form of collateral. However, not everyone has families that can loan them funds. So what’s a more just way of getting these people no-collateral loans?

“I think the Holy Grail is how you make the people that actually need the money for some real-world situation, like making a small business or making a small investment, how do you get these people access?” said Federico.

There are questions related to the ethics of providing people with no-collateral loans. One potential way for providing fair cash flow-based loans would be to use payment streams as collateral, although this isn’t the most feasible option. (Read on to hear what PWN is cooking up that can serve as a better solution!)

Guangmian commented, “Everybody's trying to see how we can bring real-world identity information, credit scores, reputation on-chain in privacy, right? So I think when we are eventually able to bring the technology that enables access to these financial instruments to the people who need it. That we need to solve.”

Scaling with Proof of Humanity

Now, let’s tackle the Proof of Humanity initiative in detail.

What is Proof of Humanity?

Simply put, Proof of Humanity is a way for anyone to link their face to an Ethereum address. It can basically be thought of as a human-based IDV identity verification system that doesn’t necessarily require individuals’ real names, passports, or identities.

How Proof of Humanity works

  • First, consumers verify themselves by putting an Ethereum address in front of the camera.
  • They recite a phrase attesting that they are basically a real human and they have not been registered in the registry before.
  • Their application will then be put before the Kleros Court for judgment.
  • Read more about Proof of Humanity in Kleros’ FAQ.

We discussed the fact that the knowledge around Proof of Humanity has still yet to grow mainstream. As Guangmian said, “Funnily enough, a lot of people in the web3 space do not know what Proof of Humanity can be used for. If we look at the undercollateralised loan space, you can kind of think of it as a glue between web2 and authentication on web3.”

Proof of Humanity solves a big issue within the web3 space, which is reliable authentication. This is something that web2 companies are already doing, and when Guangmian spoke of the “glue” binding web2 and web3 together, this is what he described.

“Companies operating in the web2 space are very privacy preserving, so when you are identifying yourself, you will be doing so often. Let's say you are using eBay or Uber. They are partnering with parties like this to do identity verification for you. They will be compliant with the privacy laws and the jurisdiction that they're operating in, be that within a country like Singapore or within Europe under GDPR,” he said.

What are the risks associated with Proof of Humanity?

Like all digital protocols, there are some inevitable risks related to Proof of Humanity. Mitigating and defending against these threats remains an active topic within the community. A couple of threats on the Kleros team’s minds include:

  • Deepfakes
  • Malicious and/or fraudulent applications to the registry (i.e. farming)

UBI tokens

In March 2021, the Universal Basic Income (UBI) coin went live on the Ethereum Mainnet. With its release, Kleros’ aim was that the price of UBI would become synonymous with a global consensus regarding how much a human’s time is worth being supported with Universal Basic Income.

First, people started to use the UBI token as currency in order to buy and sell things. Kleros is currently supporting a team that is building a web3 marketplace in which people will be able to use the UBI token to make transactions.

As described by Federico, “UBI was never thought to be like a get-rich-quick scheme. It's just meant for having people have the main things for survival in the context of technological unemployment and machines breaking out of jobs. So how can we? There are already government initiatives to do this, but how can we form the technology from the blockchain ecosystem?”

The distribution of UBI tokens relies on the Proof of Humanity registry to ensure only verified humans can accrue it. Looking ahead, the crypto space’s support of UBI will provide a lot of potential for onboarding new people into the industry.

Where are we going from here?

What’s the future of no-collateral loans and Proof of Humanity?

To achieve undercollateralized and no-collateral loans, the Kleros team envisions several protocols coming together to find a viable solution to provide and regulate these loans. They pointed out the potential of using NFTs as collateral — which is where PWN comes in!

On this note, Guangmian commented, “We need to find a good way to find the fair collateral value of an NFT. Then, we will have also made one step further in valuing something like reputation. This would then pave the way for under-collateralised loans and other related financial services.”

Federico added, “This is a world-changing technology that definitely has the potential to bring more than one billion users into DeFi. And least that’s my hope.”

Many thanks to the Kleros team for teaming up with us for such a knowledge-packed session! We look forward to building great things together.

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