# Risk Scoring

LendFriend provides transparent risk assessment to lenders, who decide what risk they're comfortable with. We follow Prosper and LendingClub's model: disclose risk clearly, let the market decide.

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## Risk Grades

Every loan receives a grade from **A (minimal risk) to HR (very high risk)**:

| Grade     | Risk      | Description                     |
| --------- | --------- | ------------------------------- |
| **A** 🟢  | Minimal   | Excellent history + strong ties |
| **B** 🟢  | Low       | Good history OR strong ties     |
| **C** 🟡  | Moderate  | Some history, moderate ties     |
| **D** 🟡  | Elevated  | Limited history or weak ties    |
| **E** 🔴  | High      | No history + large loan         |
| **HR** 🔴 | Very High | High risk situation or recovery |

**High risk grades (E-HR)** may not fund successfully. Borrowers should start smaller or build their network first.

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## How Grades Are Calculated

Grades are based on four factors:

**1. Repayment History**

* Past loan performance (on-time, late, defaults)
* Number of completed loans
* Most predictive factor for future behavior

**2. Social Trust Score**

* Connection strength between lender and borrower
* Based on Adamic-Adar algorithm (see [Social Trust Scoring](https://docs.lendfriend.org/how-it-works/social-trust-scoring))
* Weights selective mutual friends higher

**3. Loan Size Risk**

* Amount requested relative to borrower's history
* Larger loans for new borrowers = higher risk

**4. Account Quality**

* Farcaster account age and activity
* Filters spam/bot accounts

**The exact weighting and scoring formulas will be refined as we collect repayment data.** Phase 0 focuses on gathering behavioral data to build a robust risk model informed by actual performance, not assumptions.

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## Why This Works

**Research shows:**

* Prosper proved transparent risk grades work at scale [\[36\]](https://docs.lendfriend.org/resources/references#peer-to-peer-lending-and-reputation)
* Friend bids (capital contributions) reduce defaults by 14% [\[12\]](https://docs.lendfriend.org/resources/references#iyer-et-al-2016)
* Market-based filtering reduces defaults (high-risk loans don't fund)

**Key principles:**

* Lenders make informed decisions
* Market naturally filters high-risk loans
* Borrowers self-select appropriate amounts
* Short terms (30-90 days) create fast feedback loops

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## Security & Gaming Resistance

Risk grades incorporate quality filtering and Sybil resistance mechanisms. See [Anti-Gaming & Sybil Resistance](https://docs.lendfriend.org/how-it-works/anti-gaming) for how we defend against fake accounts and coordinated manipulation.

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## Lender Warnings

Before contributing, lenders see clear warnings based on risk level. [View warning system →](https://docs.lendfriend.org/how-it-works/risk-scoring/lender-warnings)

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**Next:** [Social Trust Scoring](https://docs.lendfriend.org/how-it-works/social-trust-scoring) · [Anti-Gaming](https://docs.lendfriend.org/how-it-works/anti-gaming) · [Lender Warnings](https://docs.lendfriend.org/how-it-works/risk-scoring/lender-warnings)
