Decentralized lending startup Teller has raised $1 million in a seed funding round led by Framework Ventures to build the first algorithmic credit risk protocol for decentralized finance (DeFi).

The solution will interact with legacy credit scoring systems, like Equifax, to provide aggregated data into the DeFi lending markets. Parafi Capital and Maven11 Capital also participated in the investment round.

“We need solutions that offer seamless transitions between traditional finance and DeFi,” Framework Ventures co-founder, Michael Anderson said. “Credit scores are the mainstay of the lending world, and interoperability with existing systems will allow us to iteratively phase out centralized credit scoring rather than make a sudden and risky transition to trustless lending.”

Reducing the barrier of entry by reducing the risk

The Teller Protocol aims to reduce lending risks for crypto holders and ultimately, lower the barrier to entry for mainstream consumers. Interacting with existing financial databases, the solution runs on the Ethereum (ETH) blockchain and will allow developers to use a credit risk algorithm (CRA) to reduce the amount of collateral required for a loan. Teller founder and CEO Ryan Berkun said: 

“True success for DeFi requires entering mainstream appeal; we need to stop building in a vacuum. In a trustless environment, unsecured loans are tough to architect but necessary for the evolution of DeFi. Current proposed solutions of ‘shared credit lines’ only dilute risk, rather than create true user accountability.”

Current DeFi products rely on over-collateralized ratios up to 300% to mitigate associated risks.

Defi is and will keep on growing

With the rise of popular DeFi products from Compound, MakerDAO and Aave, the sector has seen exponential growth with more than $2.5 billion in assets locked in it. Earlier this week, Framework Ventures invested in another DeFi startup Aave for $3 million in conjunction with Three Arrows Capital. The company has also supported other Defi projects including Synthetix, Chainlink, and Kava.