Brief: Goldfinch Finance
Entering the new age of DeFi, where yields are less speculative and more sustainable
As a business development staff of a defi protocol, part of my job is to look into other protocols, profile them and contact those which are suitable to propose a partnership.
Everyday I look through around 10-20 protocols and I came to a point of fatigue where I realised that most protocols out there are mere replicas with a different governance & staking tokens that have insanely high yields that are only sustained by the insane inflationary emission of their token supply.
This is done to increase initial adoption of the protocol which works but having been used by majority of the protocols, this has resulted in users to behave like mercenaries where they continuously move capital from one protocol to another to capture the initial high staking yields.
Many others also cited this as a key problem in crypto, notably Tascha:
Upon further digging, I realised that one of the key ways to attaining proper adoption and sustainable yields is by connecting defi protocols with real world assets.
One of such protocols is Goldfinch Finance.
Goldfinch is a marketplace that facilitates this by bringing the world’s lending and borrowing on-chain. A key component of this is on-chain credit history which they are building as they onboard more borrowers.
Currently, Goldfinch has over $100M in active loans across 28 countries , and hundreds of thousands of end borrowers. This is just the beginning
Mission: Expand access to capital by creating a single global credit marketplace.
They believe that everyone can participate in the global economy of the future, one’s access and opportunity to economic activity anywhere should be equal.
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low real bond yields will drive investors to demand new investment opportunities
global economic activity will move on-chain, making every transaction programmable
In turn, this results in the creation of a new public good: an immutable, publically accessible credit history and help reduce the transaction costs of the traditional financial system.
Imagine if it wasn’t just huge banks that could provide credit for these transactions, but anyone in the world, or even a smart contract.
This will lead to a new system where anyone is able to extend a loan for any transaction, anywhere.
It will be entirely re-written over the next decade, and we have the opportunity to rethink how it works. To create one that’s more fair, transparent, accessible, and owned by those who participate.
How will this be accomplished? Goldfinch is working on it with 2 key proponents:
Decentralized credit via “truth through consensus”
Unique Entity Check via NFT solutions for identity and liquidity
Truth Through Consensus
while the protocol doesn't trust any individual Backer or Auditor, it does trust the collective actions of the masses.
when more Backers supply to a given Borrower Pool, the Senior Pool increases the ratio with which it adds leverage.
As the protocol relies on counting individual Backers, they must ensure they are in fact represented by different people. Therefore, all Backers, Borrowers, and Auditors require a "unique entity check" to participate.
Unique Entity Check
World’s first NFT for identity verification.
Non-transferrable NFT representing Know-Your-Customer (KYC), Know-Your-Business (KYB), and/or U.S. investor accreditation verification on-chain.
Free to use by any other protocol
No personally identifiable data is stored on-chain
Both Backers and the Senior Pool receive an NFT representing their deposit when they supply capital.
NFT tracks capital provided and how much of it has been redeemed.
This ensures that no one redeems for more than their share of the total repayments and at any time, they can use their NFT to redeem their portion of repayments in the Pool.
Lets start by understanding the participants in Goldfinch:
Borrowers (off-chain lending businesses)
They propose deals for credit lines by creating Borrower Pools with parameters that they can define like interest rates, payment periods, etc.
Borrower Pool = smart contract through which Borrowers on Goldfinch borrow and repay capital
Goldfinch’s borrowers are mainly credit funds and later stage borrowers who are series B and beyond. They have between 2–10 years of real-world track records and has provided capital for productive businesses like
You can see the list of past borrowers via Borrower Pools here.
Investors (Backers & Liquidity Providers)
Backers: Assess individual Borrower Pools and invest first-loss capital in junior tranches and earn the protocol’s highest yields (around 12-18.75%)
As first-loss capital, they take on the highest risk as they will be the first to miss repayment when it defaults.
Liquidity Providers: Invest in the senior pool as second-loss capital which automatically allocates its funds across all Borrower Pools based on the assessment of Backers. As they take on less risk, they earn a lower yield which is currently at 7.89%.
As second-loss capital, they will have an added security of knowing that they will be the first repaid if a Pool that was assessed and invested by Backers goes into default.
How does Goldfinch work?
Goldfinch's community of Investors can supply capital to the Borrower Pools, either directly as Backers or indirectly as Liquidity Providers via the Senior Pool.
These lending businesses use their credit lines to draw down stablecoin (USDC) from their Pool. Borrowers then exchange the USDC for fiat currency and deploy it on the ground to end-borrowers in their local markets.
Goldfinch provides the utility of crypto—global access to capital—while leaving the actual end-borrower loan origination and servicing to the businesses best equipped to handle that in their own communities.
Important to note:
Real World Collateral: All Goldfinch loans are over-collateralized by off-chain assets, and are tied to real-world legal structures. Goldfinch loans to borrowers are not undercollateralized.
When repayment is made, the Borrower Pool applies the payment first toward any interest and principal owed to the senior tranche (LPs) and then to the junior tranche (Backers).
Community Governance: holders can decide the direction of the protocol.
Participant Incentives: All participants receive ongoing rewards to incentivize their participation. Liquidity Providers who supply to the Senior Pool also receive GFI tokens.
Other Features that are not live yet include Backer Staking, Auditor Votes & Staking, and community grants which you can read up on here.
It represents a Liquidity Provider’s deposit to the Senior Pool. LPs receive FIDU equal to the amount they deposit. FIDU can be redeemed for USDC at an exchange rate based on the net asset value (NAV) of the Senior Pool.
The exchange rate increases over time as interest payments are made back to the Senior Pool.
Target: Emerging Markets
Problem: In emerging markets, credit bureaus generally don’t yet exist, or are skewed towards the population’s most wealthy
A good way to visual this is with their loan extensions to Addem Capital which operates in Latin America.
Operators across LatAm have been frequently excluded from being able to raise fast, low cost, and scalable debt due to high perceived risk:
Investors, even local operators such as banks, don’t have the data needed in order to make well-informed decisions regarding which investments (i.e. risks) are or are not worth taking
Addem Capital’s monitoring and analytics platform allows them to solve for the perceived risk concern, as they can monitor how each and every loan they fund performs in near real-time.
Along with Goldfinch which provides debt capital in the form of crypto assets to borrowers like Addem Capital via a protocol for the backers & LPs to earn sustainable real-world yields on their stablecoin deposits.
RWA Sustainable Yields: Protection from Crypto Volatility
These yields are currently higher and more sustainable than the DeFi lending yields available on AAVE and Compound.
DeFi lending which is reliant on on-chain actions that strongly correlates with the sentiment and performance of the crypto markets, real world asset lending is void of that volatility.
Note: It has its own set of risks associated with real world businesses like covid-19 and supply chain disruptions.
We will cover the following core smart contracts, which are responsible for lending and borrowing:
Other contracts (lender positions, permission management, UX, governance and rewards) will not be covered for the sake of simplicity.
Tranched Pool is a representation of a tranche, split between junior and senior tranches. Senior capital is deposited here via the seniorPool contract, while junior capital is deposited into tranchedPool directly by lenders.
Senior Pool represents the senior capital that is supplied to a tranche. The amount of senior capital supplied is equal to the amount of junior capital multiplied by the leverage ratio. This ratio is controlled by governance.
Credit Line represents the terms of the loan and its loan mechanics.
All in all, Goldfinch’s mission to bridge real world asset lending and businesses with DeFi liquidity pools and crypto native assets is a key driver for the future of DeFi and we will continue to find protocols alike to research on to capitalise on the real world asset trend.