VERDICT | A Gordian knot that could bloom into a company. Proceed with caution.

MARKET | GOOD

Bloom’s stated goal is to become the global provider of consumer credit risk assessments. Its biggest competitor is FICO, which serves 90% of US lenders and offers credit scoring in 20 countries. Demand for consumer credit scores is highly cyclical, and the revenue opportunity is modest by startup standards. Worldwide, the market generates less than $1B USD. FICO’s revenue from credit scores was $241M USD in 2016, representing 27% of the company’s total revenue.

The only reason to aim this small is to obscure a larger opportunity. Ultimately, the money is in building applications on top of the Bloom protocol and/or moving to adjacent services like lending. (Curiously, the team has denied the possibility of becoming lenders.[1])

STRATEGY | POOR

Bloom is tackling at least six distinct problems. This lack of focus leads to a confusing product design without clear advantages over existing solutions.

EXECUTION | AVERAGE

For a moment, let’s put aside the fact that Bloom has no auditable code base, no product beta, and no deadline-driven roadmap. These would be comforting, but they’re not critical — yet. What’s critical is their ability to master two skills. The first is convincing lenders that they can make a sustainable profit issuing small loans to unproven borrowers.[2] The second is working with lenders to refactor their risk models to accommodate the BloomScore.

So far, the team has only announced one lender partner: the P2P lending platform ETHLend. A commitment from a Chase, BoA, or even the Wichita Federal Credit Union would’ve set this pragmatic heart aflame. Still, this is a good first partnership. Mistakes with ETHLend will cost less and recede faster.

TEAM | AVERAGE

In a world where a believable LinkedIn profile is a competitive advantage, Bloom’s team stands out. They’re Stanford-educated entrepreneurs with proven expertise in marketing and consumer identity verification. That’s the good news.

The bad news is that this is everyone’s first foray into financial services. The industry’s glacial pace is bound to frustrate a young team, and young they are. Four members are under 25 and the only veteran is a marketer, not an industry insider. It’s also unclear whether anyone has quit his day job to focus on Bloom full-time.

ICO | AVERAGE

It’s a reflection of the team’s marketing prowess that they’ve built a Slack community of 5,000+ and earned coverage from Inc. and HuffPo. Meeting their $50M hard cap won’t be a problem.

What’s trickier is increasing the token’s value. $50M is a hefty sum for a three-month-old side project. The CEO’s response to skeptics is that bootstrapping a credit platform is expensive and time-consuming.[3] That’s true, and their conditions do little to mitigate the risk. Consider the 18-month vesting period for founders. It’s simply incompatible with the time horizon of institutional partners. It could very well take 18 months to onboard a traditional lender.

DEEP DIVE

Here’s Bloom’s vision in its own words:

“The Bloom protocol improves the current credit ecosystem by creating a globally portable and inclusive credit profile, reducing the need for traditional banking infrastructure and opaque, proprietary credit scores. This means both traditional fiat lenders and digital asset lenders will be able to also securely serve the 3 billion people who currently cannot obtain a bank account or credit score.”

It’s jargon-heavy, but nevertheless bold and noble. The first step in realizing a bold and noble vision is narrowing the scope of the problem just enough to allow a practical starting point. In its boldness, Bloom has dispensed with step 1. Instead, it’s given us five problems tenuously linked to three solutions (“systems,” in Bloomspeak). I’ve done my best to map them here:

Bloom’s roadmap suggests that these are not isolated solutions, but rather phases in the development of a platform that will connect credit-seekers and creditors. But the white paper dissects them as distinct solutions. Solutions require problems. These are the problems Bloom highlighted. I’m doing my best here.

Let’s take a look at each solution in detail:

BloomID

BloomID is the pie-in-the-sky proposition. (Rolling your eyes takes the fun out of evaluating startups. If you want tested products, invest in insurance.)

This solution has two purposes. First, it solves a previously unmentioned sixth problem: lenders spend a lot of time and money confirming that applicants are who they say they are. That’s not what I took away from the 2008 subprime loan crisis, but I’ll buy it. Bloom lists five different pathways to confirming (“attesting”) a user’s identity. It’s fine that the company doesn’t yet know the optimal configuration of attestation sources. Society will only produce more and more ways to verify a person’s identity. I’d rather the Bloom team design a process that effectively ingests, ranks, and optimizes attestation sources than double down on one source, or a single combination of sources, now.

The second purpose is far juicier: it allows users to establish creditworthiness by having peers vouch for them. In theory, the more responsible their peers are, the more responsible they’re likely to be. Peer-to-peer staking has to overcome some significant cultural barriers. The good news is that people seem very willing to suppress psychological discomfort to save or make money. I sleep in strangers’ homes and ride in strangers’ cars all the time and happily pay AirBnB and Lyft for the privilege. I have faith that Bloom can design a user experience that constrains the awkwardness of entangling your peers in your financial decisions.

I’m less confident that the team has fully grappled with the logic of peer-to-peer staking. Its bilateral condition makes it so a staked peer’s missed payment or default undermines your own score. If a stake is permanent, then as a staker, you assume an enormous risk for short-term gain. Responsible people default for improbable reasons. Soaring hospital bills, untimely deaths, and arbitrary arrests have ruined more good families than vice. As a stakee, you expose your financial decisions to your network indefinitely. Once users feel the sear of their neighbors’ judgment, they may rethink FICO’s authoritarianism.

What if a stake isn’t permanent? This creates an interesting conundrum. If you can grant and revoke stakes at will, you could “rent out” your stake to a lower-scored peer with minimal risk to your own score. Your rental earnings would be a proportion of the renter’s savings from an interest rate lowered by your stake. Bloom would effectively turn creditworthiness into a capital asset. A scheme like this is inevitable (people love to make money), but a stake that can be bought probably can’t be trusted. It undermines the whole point of peer-to-peer staking.

BloomIQ

BloomIQ is a ledger of financial commitments presented with a heap of promises:

“BloomIQ is designed to bring the wealth of pre-existing and comprehensive credit history to the blockchain while maintaining privacy for the user by introducing a user approval-based system of information dissemination, offering a marked improvement over current systems.”

For all its claims, the product’s design is bizarrely incongruent when it comes to privacy. BloomIQ does allow the applicant to see who has access to her personal data. Whenever a new party enters the verification process, the applicant is prompted to submit the data the party has requested or approve their access to it.

That’s all well and good, until you get to this interesting tidbit: lenders will see your peer’s transaction history after they’ve issued your loan. Presumably, they’ll see your transaction history when your peers get their loans. This feature is bound to alienate users who prioritize privacy. Fortunately for Bloom, I believe these users are few. In fact, I believe a majority of people would attach nudes to their application if it halved their mortgage rate. You can’t buy much with privacy.

What is genuinely troubling is how Bloom has chosen to help its users correct errors in their credit history. From the horse’s mouth:

“In the event that information is incorrect, the user can work with the data vendor to amend their records using the same methods available today.”

In other words, not at all. This seems like a huge missed opportunity, and possibly a serious design flaw. Leaving the burden of correcting a record on the applicant — and keeping that activity offline — keeps the balance of power firmly on the side of institutions. It also presumes a lot about the average person’s ability to interpret a financial document designed for lenders and their algorithms. (Let he who doesn’t automatically agree to Terms & Conditions cast the first stone.) This user behavior will persist. We have to ask: what will happen when an unwitting applicant allows an erroneous record to be written into an immutable and permanent ledger?

BloomScore

Billed as a “decentralized credit score,” BloomScore evaluates a consumer’s creditworthiness by using metrics that are relevant for that consumer’s stage of credit history. This is a good idea. Bloom has presented its scoring algorithm in detail, which is appreciated but unnecessary. At this stage, its most important output is accuracy. Transparency without accuracy is worthless.

Users with high FICO scores will see little value in Bloom’s multi-step, usage-based credit building process. They’re not in Bloom’s primary customer segment (I think?), but they play an important role as stakers. Converting them from stakers to users will require a better on-ramp than BloomScore.

BloomCard

Surprise! Even though Bloom pinky-promises to stay away from lending, it’s issuing a credit card. Imagine that.

The Token

As with many utility tokens, BLT has purchase and voting power. Below, I’ve outlined my understanding of the three economic transactions the token will facilitate:

These are all a little improbable; that’s the fun of it. The third transaction is Bloom’s way of prioritizing the network’s function and security over common startup wisdom. Typically, you reward users for referrals. I’ve never heard of referral scheme requiring payment from referrers. For some reason, I find this blithe rejection of startup gospel attractive instead of naive.

BLTs also allow token holders to vote on the design of the scoring algorithms. This is a minefield of a plan, but its feasibility isn’t important because Bloom can always default to no voting. FICO didn’t corner 90% of the market because it developed algorithms democratically. I am curious, however, as to how Bloom will sell this plan to lenders. In theory, each credit pull decreases their voting power while increasing the voting power of their counterparty.

[1] https://blog.hellobloom.io/bloom-weekly-update-10-26-62d576b9cffa

[2] To get a sense of how hard this is, read the New York Times’ Detroit: From Motor City to Housing Incubator

[3] https://blog.hellobloom.io/how-bloom-will-use-funds-6c0c9eb4b738