If a majority of the people in a village recognize me as Tom, then I am indeed Tom as far as my identity is concerned. Identity can be also issued by an authority, and in the absence of a central authority be based on your location in the social network.
The term social network here is literal. In a village typically you are literally the son of XYZ who happens to be the brother of ABC and so on. Everyone is connected to everyone else via a series of links and reputation accumulates over time through first hand experiences that are quickly dissipated through the network.
Traditional borrowers' offers can be easily validated and linked to them by them confirming them on their online channels.
For a non traditional borrower you need to know who they are in some form.
And for that we first establish a DEFI identity.
We do this by allowing a user to mint an NFT that has several parameters that allows it to say that it is related to another address via a certain relationship. The other party has to confirm the request before the relationship is verified. Once you have a few of these are established you have a web going that allows you to determine the “identity” of the person.
The identity here can be simply relationship requests where each party vouches for the other for X amount of dollars. In the event a particular borrower defaults, there is no recourse however the system records who the first degree contacts were and impacts their credit score alongside the defaulter. Thus not only does it reduce the ability of the borrower to borrow again but also impacts those who vouched for him/her.
Repaying in a disciplined manner boosts the scores for all parties involved.
The system can be gamed in theory, however by giving the choice to the lender and not sharing risk the system allows room for even unsecured lending to function.