Qiro X Ritual: Powering Distributed Credit Underwriting

Qiro Finance, with Ritual’s infernet compute framework, is introducing a new approach to credit underwriting, enabling transparent risk evaluation and monitoring for RWA backed lending use-cases on-chain. Let’s dive in deeper.

It’s currently live and serving underwriting results for Qiro Marketplace Testnet. All the lending pools deployed on Qiro are underwritten through distributed underwriting infrastructure.

RWA tokenization is on the rise

The tokenization of Real-World Assets (RWAs) is emerging as one of the most significant trends in decentralized finance (DeFi) for 2024. With predictions that the RWA market will grow exponentially, some areas are expected to see as much as 10x growth this year alone​. RWAs, including private credit, real estate, bonds, and other tangible assets, have gained momentum as they bring the stability and returns of traditional finance (TradFi) to the innovative world of DeFi.

RWA backed lending is hard

However, despite its huge potential, RWA backed lending in DeFi presents unique challenges. One of the most significant hurdles is the off-chain nature of these assets, which complicates on-chain tracking and risk evaluation. While DeFi platforms like Aave and Compound excel in underwriting collateralized loans, extending this to uncollateralized loans like RWAs is more complex.

Current DeFi protocols often rely on centralized intermediaries for RWA underwriting, reducing DeFi's role to a mere capital formation tool without risk management capabilities. This approach has led to adverse loan selection in most cases causing millions of dollars in credit defaults. Qiro want to change this.

Qiro X Ritual: Distributed Credit Underwriting

Qiro will enable under-collateralised lending protocols to access asset data, evaluate & monitor credit risk by leveraging a distributed network of underwriters. Qiro will enable RWA underwriting by leveraging the advanced inference execution layer provided by Ritual.

Ritual’s Role: Ritual provides a sovereign execution layer optimised for AI, with the first phase—Infernet—enabling access to models both on-chain via smart contracts and off-chain.

Qiro uses Ritual Infernet to allow professional credit underwriters to deploy credit models off-chain and post model results on-chain. Specifically, Infernet nodes will receive on-chain requests to compute credit scores based on credit data from off-chain sources and post these scores on-chain. Smart contracts can then aggregate these results, facilitating more informed loan structuring and risk management.

Every node in Qiro’s underwriting network is capable of 3 main functions

1. Access to Credit Data: Accessing financial information on the borrower and the assets portfolio. This includes asset identification, performance data from different sources.

2. Credit Risk Evaluation: Executing credit risk models to derive standard metrics required for structuring un-collateralised loans on-chain.

3. Credit Risk Monitoring: Continuous Monitoring of the real-world collateral for early warning signals and active risk management.

What does this enable for DeFi lending?

One of the critical innovations Qiro brings to the DeFi is the ability to conduct credit underwriting for under-collateralised loans. This capability represents a significant advancement in the lending products on-chain. With the ability to access off-chain data combined with risk assessment expertise, Qiro can enable a plethora of use cases.

A few of the prominent use cases like Fintech loan Securitisation, Cash-Flow based loans, Trade Finance, DePIN Financing, Credit Cards, etc can enable millions of value to be brought on-chain, which was otherwise not possible.

We have written more here: https://qiro.substack.com/p/what-can-qiro-enable-for-defi-lending

First use-case: Qiro Private Credit Marketplace

The first application of this distributed underwriting network will be within the Qiro Marketplace, where fintech asset originators are tokenizing loan portfolios to secure credit on-chain. Every time a lending pool is created on the Qiro marketplace, this underwriting network will provide the probability of default, expected losses and pool rating to help structure the loan on-chain.

It’s already live on public testnet at: https://testnet.qiro.fi

The Underwriting Process

1. Asset tokenisation: Asset originators will tokenise their assets, attaching important asset attributes to be used for underwriting.

2. Underwriting Request: Request for underwriting is initiated by calling the consumer contract, and passing the Asset NFT as input.

3. Underwriting Model Execution: Nodes receive the underwriting request from the coordinator contract. Every node automatically executes the respective credit risk model. Upon completion, the results are posted on-chain with the attached proof of computation. The proof is also stored on an Arweave.

4. Results Aggregation: Results from all the nodes are aggregated on-chain to be further used for loan structuring and risk management.

Enterprise Grade Credit Underwriting Models

Qiro underwriters will be deploying credit risk models which execute on the off-chain loan portfolio data with financials to derive the underwriting results. These credit models could range from simple rule based flows like decision tree to complex risk prediction models depending on the lending use-case.

Underwriting results from these nodes will be posted on-chain for structuring the lending pools on-chain.

1. Weighted Credit Score: This is a composite score that integrates various credit factors to assess an asset's overall creditworthiness. This is benchmarked with the rating criteria from the traditional credit domain.

2. Probability of Default (PD): This metric evaluates the likelihood that borrowers will default on their obligations. It is calculated based on historical data and predictive modelling.

3. Loss Given Default (LGD): This estimate represents the expected amount of loss in the event of a default, accounting for any collateral or other mitigating assets.

4. Exposure at Default (EAD): This measures the total value at risk if a borrower defaults, considering the loan terms and the borrower's financial standing.

5. Net Asset Valuation: This parameter provides a precise valuation of the borrower’s assets, offering insight into their financial stability.

6. Credit Limit: This is the upper credit limit that can be extended to a borrower, ensuring that lending practices remain within safe and sustainable limits.

7. Interest Rate: This estimates the interest rate for the loan based on quantitative parameters, underlying assets, geography, forex risk etc.

These results are available in the Qiro marketplace lending pools. We will also be launching a public underwriting explorer in coming days, so anyone can verify the underlying assets, nodes and underwriting inferences on their own.

Incentives Alignment

After posting these results on-chain, underwriters who have confidence in the asset originators demonstrate this by putting “skin in the game” i.e. investing in the junior tranche(high-risk tranche), aligning their incentives with the loan's success. This approach encourages prudent risk-taking and enhances the robustness of the credit evaluation framework.

The Future of Credit Underwriting for RWAs

Qiro aims for this network to become the standard credit data and underwriting infrastructure for RWA credit marketplaces and protocols. The collaboration between Qiro Finance and Ritual marks a significant leap forward in underwriting of tokenized RWAs.

About Ritual

Ritual is at the forefront of integrating AI with blockchain technology. The platform’s first phase, Infernet, is already live, providing developers access to models both on-chain and off-chain. Ritual's next phase, the Ritual Chain, will serve as an execution layer custom-built to support AI-native operations, enabling a new class of decentralized applications at the intersection of crypto and AI.

Website: https://ritual.net

About Qiro Finance

Qiro Finance is building credit underwriting infrastructure for RWA financing. By leveraging Ritual’s inference stack, Qiro sets a new standard for transparency, efficiency, and risk management in DeFi lending. The Qiro Marketplace will be the first to implement this innovative approach, underwriting all the lending pools on the platform.

Website: https://qiro.fi

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