# Goldfinch By [andriibohdan.eth](https://paragraph.com/@andriibohdan) · 2024-03-15 --- Overview Goldfinch is a [Decentralized Finance (DeFi)](https://golden.com/wiki/Decentralized_Finance-R9YME4J) credit platform that loans out [cryptocurrency](https://golden.com/wiki/Cryptocurrency-8Y) to users without requiring that they have crypto collateral themselves. This allows the company to provide access to cryptocurrency to emerging markets and to offer a stable yield to the lenders. The company was co-founded in July 2020 by [Michael Sall](https://golden.com/wiki/Michael_Sall-63X648G) and [Blake West](https://golden.com/wiki/Blake_West-5KX6MG3), who both formerly worked at [Coinbase](https://golden.com/wiki/Coinbase-5KR). According to its [whitepaper](https://golden.com/wiki/Whitepaper-ZXZR5RM), Goldfinch's lending model relies on four core participants: borrowers, backers, liquidity providers, and auditors. This protocol is intended to allow for cryptocurrency borrowing without borrowers needing cryptocurrency collateral. Products and services In Goldfinch's lending model, borrowers are the participants seeking financing. To begin the process, borrowers propose borrower pools, which define the terms of their loan, such as interest rate and repayment plan. Borrower pools are then assessed by backers, parties who decide whether or not to provide first-loss capital. If approved, borrowers may continue to borrow and repay through the borrower pools. Liquidity providers supply capital to the senior pool, allowing them to earn a passive yield. This senior pool automatically allocates capital to the borrower pools, based on the number of participants, by using a Leverage Model. This increases the backers' effective yield and incentivizes them to provide the first-loss capital in the beginning. The final participants, auditors, vote to approve borrowers, a required step before they can join the borrower pools. As of 2021, Goldfinch is not yet available to use within the [United States](https://golden.com/wiki/United_States-NARPDV). The company offers loans and financing in [Mexico](https://golden.com/wiki/Mexico-6483DP), [Nigeria](https://golden.com/wiki/Nigeria-ENMN), [India](https://golden.com/wiki/India-YY4Y), and [Singapore](https://golden.com/wiki/Singapore-MNYJ5) through its partnerships with [Payjoy](https://golden.com/wiki/PayJoy-4N9JA4E), [Quickcheck](https://golden.com/wiki/Quickcheck-39W6R6V), and [ALMA](https://golden.com/wiki/ALMA-VW59X94). The website promises that more partnerships will be available in the future. However, as it waits for approval in the United States, Goldfinch has grown to an outstanding loan volume to over $38 million in early 2022, and the protocol is serving over 200,000 borrowers in eighteen countries, with capital for a range of uses—including motorcycle taxis in Kenya, financing small businesses in Brazil, and providing eco-friendly cookstoves for low-income households in India, to name a few. The following are total active loans by country, as of January 2022. Borrowers Borrower pool The creation of the borrower pool is a smart contract. Through this tool, borrowers can borrow and repay capital. Any borrower is capable of creating a borrower pool, and in turn they can set the terms of the pool, such as the interest rate, the total capital that can be borrowed, the repayment period, the term, and any late fees. In this way, the borrower pool is more like an offer sheet to potential lenders, and the creation of such a sheet does not guarantee that a lender will agree to their terms. Further, borrowing is broken into two tranches. The first tranche, the junior or first-loss tranche, is what borrowers need to convince backers to supply. The amount the borrower is lent is then based on this supply, combined with the amount the senior pool allocates. This second part of the loan, the senior tranche or senior pool, is the amount allocated based on Goldfinch's Leverage Model. As borrowers are trying to convince backers to lend, they are incentivized to impose reasonable caps on their borrowing. Further, in order to create a borrower pool, the borrower is required to stake an amount of GFI equal to double the cost of an auditor approval, which is a fixed rate set by the protocol. This is done in order to help guard Goldfinch against spam by signaling to backers that the borrower is serious. The first half of the staked GFI is used for the first auditor approval, while the borrower is able to redeem the remaining staked GFI when they have repaid their balance. With the architecture of the borrower pool, Goldfinch uses NFTs rather than tokens. This is to allow the company to ensure that backers can only redeem a proportional share. For example, if two backers have supplied equal amounts to a loan, and the borrower has paid back a portion of that loan, the backers are only entitled to a 50 percent portion of the principal paid back. Summary of borrower incentives 1. Backers may form off-chain legal agreements with borrowers (but while not explicitly supported by the protocol). Backers may require such an agreement to be in effect, either with them directly or with another backer, in order to be willing to supply capital. In these cases, the legal agreement and potential recourse are other important incentives for borrowers. 2. Borrowers need to publicize their address when proposing pools to backers; their on-chain history becomes public to future creditors (even those off-chain). Backers Backers are responsible for evaluating borrowers and supplying the first-loss capital to the borrower pools. Backers also achieve better returns when the senior pool leverages them with a senior tranche pool. In this model, the backer evaluates the proposal of a given borrower pool, and in the case in which they find the terms agreeable, will provide capital to the junior tranche of the pool. If senior tranche capital is attached to the borrower pool, the junior tranche is reallocated with 20 percent of the senior tranche's nominal interest to represent the higher risk in the junior tranche. The protocol retains 10 percent of all interest payments as reserves. These reserves are managed by the decentralized governance. In the case of a borrower pool that borrows $1 million with a 15 percent interest rate, with a 1-year term, in which the backers supply $200,000, and the senior pool allocates the remaining $800,000, results in $150,000 in interest. Of that interest, the senior pool receives $84,000, or 10.5 percent interest; the backers receive $51,000, or 25.5 percent interest; the remaining $15,000 is the 10 percent protocol reserve allocation. Rewards In order to incentivize backers to be the first one in a borrower pool and supply earlier, the protocol provides a GFI reward to backers who contribute early. The reward diminishes as more backers supply a borrower pool, until a specified limit is reached. This is to solve the problem of confidence, or lack of, in borrower pools that have not yet received backing. The reward is not immediately claimable, but rather is proportional to the percentage of the full expected repayment of principal plus interest that is successfully repaid. This means the reward is only given to the backer after the borrower pool proves valuable to the protocol and to ensure backers are not supplying borrower pools for the reward alone, but are properly evaluating the borrower pool before supplying. Other than evaluating borrower pools, backers are also able to evaluate other backers. This allows them to give other backers leverage by staking GFI on another backer. The amount of staked GFI on a backer is then used for the senior pool and the leverage model to calculate a leverage ratio and allocate capital whenever that backer supplies to borrower pools. Such that if a borrower has a 4 times leverage ratio, the senior pool will allocate four times the amount they supply to a given borrower pool. Liquidity providers As the name suggests, liquidity providers supply capital to the senior pool to earn passive yield. The senior pool then allocates capital among the senior tranches of borrower pools according to the Leverage Model. This can provide both diversification to the senior pool and seniority to the first-loss capital of backers. The process of senior pools allocating capital to senior tranches does not involve seeking the permission of different borrowers, nor does it involve any evaluation of the borrower pools, as that is the responsibility of the backers. When liquidity providers supply to the senior pool, they receive an equivalent amount of the ERC20 token FIDU. The FIDU token can be redeemed for USDC at an exchange rate based on the net asset value of the senior pool, minus a 0.5 percent withdrawal fee. This exchange rate matures as interest payments are made back to the senior pool. It is also possible that when a liquidity provider wants to make a withdrawal, there may not be sufficient USDC because it has been borrowed. If this happens, liquidity providers have to return when new capital enters the senior pool through repayments or new liquidity providers. Auditors Auditors are responsible for performing human-level checks on borrowers to confirm they are legitimate in order to further secure the protocol against fraud. Borrowers require the approval of auditors to borrow from borrower pools. For auditors, they are required to stake GFI in order to be selected for votes, and then they earn GFI rewards when they vote with the majority of the other auditors. Auditors can be anyone, so long as a minimum of GFI has been staked and the individual has passed the Unique Entity Check. In the event of a vote being requested, nine auditors are selected on a random weighted basis, which is based on the amount of GFI auditors have staked. If selected, an auditor is then responsible for evaluating if a borrower seems to be legitimate and provide a confirmation that the borrower does what they claim and do not appear to be colluding with other participants. Approval votes To achieve this audit, auditors can do whatever needs to be done, including reviewing off-chain documents provided by borrowers, and communicate with borrowers directly. The protocol only requires the final vote from the auditors. In order to request such a vote, the potential borrower has to stake enough GFI to reward auditors for their vote. If more than two auditors vote "no," the GFI staked amount is slashed. In the case of a vote, auditors have forty-eight hours to provide a "yes," "unsure," or "no" vote. Their GFI is slashed if they fail to vote in the forty-eight hour window or if they vote against the majority. If auditors vote "unsure," there is no penalty and also no reward. The vote offers three potential outcomes: Full approval—this occurs when a borrower pool achieves at least six "yes" votes and no more than one "no" vote. This acts as an approval, and senior pool can be allocated to the borrower pool. Backer-only approval—this occurs when there are at least six "yes" or "unsure" votes and no more than one "no" vote. In this case, the borrower is approved to access capital, but the senior pool does not allocate capital to the pool. No approval—this occurs when there is more than one "no" vote, or when there are not enough votes to meet the above thresholds, and in this case the borrower is not approved to access capital. Leverage Model Goldfinch mimics some of the features of the traditional lending market, in which banks assess the creditworthiness of a given borrower based on their own credit and risk analysis. This is done by "the protocol \[through\] the concept of 'trust through consensus': that borrowers can show creditworthiness based on the collective assessment of other participants, rather than based on their crypto assets," as co-founder Blake West has explained. The Leverage Model, or protocol, in this way determines how much capital the senior pool allocates towards a given borrower pool, which is in turn based on the trust score developed by the model. The protocol then uses the collective consensus as a signal for allocating capital. This further, by removing the need for cryptocurrency collateral, and providing a means for passive yield, offers a chance to increase potential borrowers and their access to cryptocurrency, while also providing potential capital providers with greater exposure to borrowers. Because the Leverage Model relies on counting individual backers, it is necessary to ensure these are represented by different people, and requires all backers, borrowers, and auditors to complete an unique identity check to participate. --- *Originally published on [andriibohdan.eth](https://paragraph.com/@andriibohdan/goldfinch)*