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As the DeFi ecosystem continues to mature there are a number of protocols/applications enabling users to borrow against their crypto portfolio, akin to borrowing against a stock portfolio in the traditional finance world. Even centralized exchanges like Coinbase and Binance let users borrow against crypto holdings today and receive funds nearly instantly.
That said, borrowing against a portfolio of crypto assets - or even equities for that matter - is inherently risky and users can be required to contribute incremental capital if the value of the underlying assets drops significantly (margin call). Risks aside, there are a number of benefits to borrowing on margin in DeFi: maintaining exposure to the underlying asset, avoiding a taxable event but even more importantly - near instant disbursement of funds and no cumbersome underwriting or KYC (know your customer) requirements.
But what options are available to people who don’t have a large enough crypto portfolio to borrow against?
These prospective borrowers are relegated to apply for a loan through traditional financial institutions. This often includes credit checks, supplying months of bank statements, KYC (or other equivalents) and restrictions on what loan proceeds can be used for. And that assumes borrowers even have access to a traditional banking system that can facilitate formal loan underwriting. Without even basic banking infrastructure in place, borrowers are forced to rely on other local/informal lenders with substandard and predatory terms. Today, it’s nearly impossible for borrowers to benefit from the massive improvements to lending in DeFi unless they have a large enough asset base.
What if there was a solution that (1) enabled borrowers to benefit from the ease, speed and simplicity or taking out a loan in DeFi - but without the over-collateralization and (2) permitted anyone in the world to earn a return on their capital, all while doing so at scale and with the right incentives in place to encourage responsible borrowing and repayment?
Enter Goldfinch. Goldfinch is a decentralized credit protocol for crypto loans without collateral and is focused on “expanding access to capital in emerging markets where crypto can truly power financial inclusion”
Underpinning that focus on expanding access to capital is Goldfinch’s core belief that there’s vast untapped lending potential in the world. The suppliers of capital (or lenders) are limited in their reach due to the constraints and friction of traditional lending channels, and yet there’s a massive group of individuals and institutions looking to earn yield on idle capital. Goldfinch’s focus is building out a platform that empowers anyone to be a lender, not just banks. (Source: Goldfinch)
Goldfinch is tackling this massive opportunity with a protocol built on the foundational principle of trust through consensus and frames the potential succinctly in the whitepaper:
The Goldfinch protocol creates a way for borrowers to show creditworthiness based on the collective assessment of other participants - or a way to crowd source assessing a borrower’s creditworthiness - rather than based on their crypto assets. The protocol can then use this collective assessment as a signal for automatically allocating capital. By removing the need for crypto collateral and providing a means for passive yield, the protocol dramatically expands both the potential borrowers who can access crypto and the potential capital providers who can gain exposure. (Source: Goldfinch)
To date, Goldfinch has served over 200K+ borrowers across India, Mexico, Nigeria and other countries, all while generating 10-14% yields for lenders.
Fundamentally, the protocol enables (1) Borrowers to borrow (or draw down) capital in the form of stablecoins from pools and exchange for local fiat and (2) lenders (both Borrowers and Liquidity Providers) to deposit assets in said pools to earn a return on their invested capital.
Each party interacting with the protocol will be covered in more detail below, but at a high-level they are:
Borrowers: Participants borrowing money; Borrowers propose “Pools” for Backers to evaluate and propose key terms of the Pool including amount, duration, interest rate, repayment schedule, etc.
Backers: Backers are one of two different types of lenders, allocating their capital directly to Pools of their choosing
Liquidity Providers: Liquidity Providers (LPs) represent the second type of “lender”; instead of funding Pools directly like Backers, LPs instead deposit capital into the “Senior Pool”. The Senior Pool contains LP capital only and sits senior (or ahead) of other lenders in the capital stack, meaning LPs have first claim on Borrower repayments
Auditors: The “gatekeepers” for all Borrowers; before Borrowers can actually borrow the funds, Auditors must validate the legitimacy of each Borrower, acting as an additional safeguard against collusion and/or fraudulent behavior
Originators: Participants who can - but aren’t required to - assist in the creation of Borrower Pools, helping propose terms in line with market expectations and facilitate the entire borrowing process
It’s important to note that both Backers and LPs are providing capital to borrowers, but LPs sit above Backers in the capital stack. By definition, LPs are indirectly funding the “senior tranche” of each Borrower Pool through their contribution to the Senior Pool - meaning they have first claim on repayments - while Borrowers fund the “junior tranche” with second claim on repayments.
Borrowers
Participants borrowing money; Borrowers propose “Pools” for Backers to evaluate and dictate key terms of the Pool including amount, duration, interest rate, repayment schedule, etc.
Each Pool that Borrowers propose is a smart contract through which Borrowers draw funds and make loan repayments with a unique set of financing terms (rate, term, funding cap, late fees, etc.). Just because a Pool is created doesn’t necessarily mean Backers will fund it - Borrowers must structure the terms in a way that offer strong enough risk-adjusted returns relative to the other Pools Backers can fund. To create a Pool, Borrowers are required to stake GFI, the Goldfinch governance token (covered in more detail later).
A counterpoint to Borrowers proposing pools is that Backers are more familiar with “market terms” for lending and leaving Borrowers to dictate terms could result in a poor user experience or a supply <> demand mismatch. The core belief for that not to be true is that Borrowers are more efficient at sourcing loans (e.g. identifying the specific use case for capital in say a smaller, less developed market) and that advantage offsets any downside from Borrowers “guessing” loan terms. (Originators also play a role in defining terms which is covered in more detail below).
Stepping outside of the protocol for a second and back to the traditional loan process today, loan underwriters conduct extensive diligence before approving a borrower, including credit history, employment and use of proceeds, among other things. This process helps lenders determine ability to repay, but equally as important - serves as information to go after borrowers for recourse in the event of nonpayment.
Borrower Incentives
Given the decentralized nature of the Goldfinch protocol and lack of “traditional” underwriting practices to diligence Borrowers, protocol incentives are designed to encourage proper behavior (e.g. repayment) and discourage irresponsible behavior. This includes:
Preventing Borrowers from borrowing additional funds once they’re in default until both Backers and LPs are made whole
Encouraging on-time repayment to establish a positive on-chain borrowing history (similar to building a credit report)
Leveraging off-chain agreements; while not supported by the protocol today, Borrowers and Backers can execute formal written agreements that enable Backers to seek recourse from Borrowers in the event of non-payment
Backers / Liquidity Providers (LPs)
Backers contribute capital directly to Borrower Pools based on the terms proposed by Borrowers. LPs - another “flavor” of Backers - instead contribute capital directly to the Senior Pool. The Senior Pool then algorithmically allocates LP capital across different Borrower Pools, enabling LPs to earn passive yield.
Borrower Pools are predominantly funded by Backers, but can also be “topped up” with capital from the Senior Pool (funded by LPs). The proportion of contributed capital from the Senior Pool is determined by the “Leverage Model” based on the amount of trust in the Borrower Pool. The more distinct Backers funding a given pool, the more “trust” there is in that pool, thereby increasing the capital contribution from the Senior Pool (known as applying leverage). As repayments are made by Borrowers, those flow back to the Senior Pool and, by default, the LPs who contributed capital, generating the passive yield. Specific construct/design of the Leverage Model isn’t covered in this piece, but details can be found here.
It’s easy to draw similarities between the protocol determining the “level of trust” based on distinct Backers and a real life scenario. For example, say you had leaking pipes at your house and required the expertise of a local plumber to fix it. No matter what, you want to find a plumber you trust to do a quality repair. One way to establish that trust is to ask others about the quality of work that the plumber completed for them. Maybe your neighbor used this same plumber a few months ago and the work was satisfactory. But that’s only one of the plumber’s clients - what if the other ten people the plumber worked with prior to your neighbor had awful experiences? To de-risk the possibility of incorrectly determining the “level of trust” in this plumber, you could call another five people who have worked with this plumber before to ask about their experiences (moving from n=1 to n=6).
Similar to the Leverage Model, by increasing the number of people willing to vouch for the plumber’s work (e.g. more distinct Backers willing to fund the Pool), you can increase your level of confidence - or trust - that the plumber will do quality work on your leaking pipes (e.g. the Borrower will repay the loan on time).
Backer + LP Incentives
Circling back to the breakdown of capital contributed by Borrowers and LPs to each Pool - capital from the Senior Pools (or LPs) is inherently lower risk as it has first claim on principal and interest repayments. To account for that lower risk, 20% of interest earned by the Senior Pool is reassigned to Backers - or the second-claim junior tranche. Additionally, 10% of all interest repayments are held back by the protocol and contributed to the reserve, meaning the Senior Pool earns 70% of the stated interest rate.
Per Goldfinch, the Senior Pool earns an effective interest rate equal to 70% of the nominal interest rate. Or, in terms of the nominal interest rate (nominal), protocol reserve allocation (p) and junior reallocation percent (j):
Senior Pool interest rate = nominal interest rate * (1 - p - j)
On top of rewards generated by the (1) Pool’s stated yield and (2) 20% share of interest from the Senior Pool, Backers also have the opportunity to earn GFI for being an early Pool backer. The earlier the Backer is to a Pool, the greater the GFI rewards. The earliest Backers are taking the highest risk since there isn’t yet a “collective stamp of approval” from a lot of Backers funding the Pool - therefore these early Backers must be compensated accordingly. The early-backer rewards reduce over time as the number of committed Backers increases and perceived risk decreases. Backers have full rights to the GFI granted, but it is not immediately redeemable. An increasing portion of GFI is redeemable as Borrowers repay capital, incentivizing Backers to support only quality Borrower Pools.
Backers are also incentivized to stake their GFI on other reputable Backers. Per the whitepaper:
In addition to evaluating individual Borrower Pools, Backers may also evaluate other Backers in order to give them leverage. Backers can do this by staking GFI directly on another Backer. When GFI is staked on a Backer, that GFI serves as collateral against potential defaults for that Backer’s positions in Borrower Pools. When a Borrower defaults, the GFI staked on all the Backers in that pool are reallocated to the senior tranche until the senior tranche is made whole on their expected payments.
To summarize, the rewards paid out to Backers and LPs solely by funding the Pool is outlined in the diagram below and includes:
Backers
Repayments of principal and interest (second claim)
20% interest reassigned from the Senior Pool
GFI rewards from being an early Pool backer and/or staking GFI on other reputable Backers
LPs
Repayments of principal and interest (first claim)
70% of the stated/nominal interest rate for a given Pool
Also eligible for additional liquidity mining rewards which are covered in more detail below
Auditors
Auditors are the “gatekeepers” for all Borrowers. Before Borrowers can borrow funds, Auditors are required to validate the legitimacy of Borrowers, acting as an additional safeguard against collusion and/or fraudulent behavior by Borrowers. Note that the Auditor construct isn’t yet live in the protocol today and the Goldfinch team is serving as this final checkpoint in the interim.
In an effort to exclude Borrowers with ill-intent from participating in the protocol, each Borrower must receive an “approval vote” from Auditors before drawing down any capital from the Pool. As noted in the whitepaper, Auditors are not evaluating the Borrower’s creditworthiness but instead providing confirmation that the Borrower does what they claim to do and there is no collusion with other participants (e.g. a Ponzi scheme where funds borrowed from one Pool are used to support repayments to another Pool). To prevent this and other types of collusion, Auditors are required to (1) undergo an entity check and confirm their true identity and (2) stake GFI that can be slashed if an Auditor acts erroneously (specifics on the auditor process can be found here).
Originators
Participants that can - but aren’t required to - partner with Borrower Pools to dictate terms and source those Pools for the protocol.
Goldfinch currently reviews all Borrower Pools before opening up to Backers and LPs. While it’s crucial to have this level of centralized decision-making in the near term to control for quality, this doesn’t fully align with the broader ambitions of empowering anyone in the world to be a lender. Originators are similar to scouts, advising Borrowers on terms and helping onboard them to the protocol. For example, someone working as part of a local small business advocacy group could specialize in helping get local businesses (or Borrowers) onboarded onto the protocol and set repayment terms, enabling anybody in the world to lend to these local businesses (Backers). In exchange for their services, Originators are paid a fee - defined as a percentage of interest on the borrowings - and that fee is repaid after paying LPs (senior tranche) and Backers (junior tranche), meaning Originators are incentivized to only onboard high quality Borrowers.
GFI is the Goldfinch protocol token and is used today for community governance and participant incentives. The token is limited to these two uses cases for now, but there are additional future use cases (per the whitepaper):
Participant Incentives: Backers who supply to Borrower Pools and stake on other Backers, Auditors who stake to participate in votes and Borrowers who successfully repay their pools
Backer Staking: Backers can stake their GFI tokens on other Backers in order to give them additional leverage when participating in Borrower Pools. This GFI also serves as a backstop against potential loan defaults
Auditor Votes: Auditor votes are required to grant Borrowers permission to borrow from the protocol, and Borrowers pay for these votes with the GFI token
Auditor Staking: Auditors stake the GFI token in order to be selected to participate in Auditor Votes
Community Grants: The community can decide to provide grants to participants that meaningfully contribute to the Goldfinch protocol and ecosystem
The remainder of this section will further explore the role of GFI in community governance and liquidity mining incentives.
Governance
Governance is managed by a community DAO and has the ability to perform maintenance functions and adjust other parameters of the protocol, including:
Upgrading contracts
Changing protocol configurations and parameters
Selecting Unique Entity Check providers
Setting the rewards and distribution of GFI
Pausing protocol activity in the event of an emergency
Liquidity Mining Incentives
As a reminder, LPs supplying capital to the Senior Pool can be thought of as “passive investors” and earn a return on their capital through the form of (1) Borrower repayments and (2) GFI rewards. Borrower repayments are relatively straightforward, but the following sections specifically covers GFI rewards for LPs.
When LPs supply capital to the Senior Pool they receive a proportional amount of FIDU - an ERC-20 token representing committed capital. FIDU can be redeemed for USDC at any point based on the total value of the Senior Pool, but the redemption rate is variable and is least favorable at the point of the Pool’s inception. This exchange rate becomes more favorable as time progresses, incentivizing LPs to keep their capital in the Senior Pool.
Once LPs have FIDU they can then turn around and stake that FIDU for GFI rewards. Based on the whitepaper, GFI rewards are granted at a variable distribution rate which acts as a balancing mechanism to ensure the target Senior Pool total balance set by Governance remains consistent.
In a scenario where the Senior Pool is under the target balance, the GFI issuance rate increases to compensate for that shortfall - and incentivizes LPs to put in more capital to the Senior Pool until equilibrium is reached. Conversely, if the Senior Pool balance is over the target, the issuance rate will decline and incentivize LPs to take money out and invest it elsewhere. As outlined by Goldfinch, this mechanism “helps incentivize a healthy utilization and APY for the pool, relative to loans outstanding.”
Community governance ultimately determines the issuance rate at which GFI is granted to LPs, but is influenced by:
Target Senior Pool Balance: Target is based on expected future capital needs. Should be high enough to attract the required capital, but not too high where the protocol is unnecessarily distributing GFI to capital sitting on the sidelines
Target Range: Range around the “Target Balance” along which the min and max distribution rates are applied. It is represented as two percentages (e.g. min: 50% of the target balance, max: 200% of the target balance). Described in more detail below
Minimum/Maximum Rate: The lower and upper bounds of GFI distributed per second.
Similar to how the FIDU <> USDC exchange rate is less favorable initially to incentivize LPs to keep their funds invested, there is a similar construct applicable to GFI earned from staking FIDU - GFI distributions earned by LPs from liquidity mining unlock linearly over the first twelve months and any LPs withdrawing their capital from the Senior Pool will forfeit unearned GFI distributions.
The diagram below articulates the linear function of the reward rate, which increases as the Senior Pool balance is below the target - driving capital inflows - and declines if the Senior Pool balance is above the target - incentivizing withdrawals:
Today, the target range is $50-200M, target balance of $100M and a maximum issuance rate of 0.5% of GFI supply per month (minimum is zero).
To summarize, the liquidity mining program enables LPs to earn FIDU proportional to capital committed and stake that FIDU to earn GFI rewards at a variable % APY.
Initial GFI supply is capped at 114,285,714 tokens. Today there is no inflation, but the Goldfinch team has explicitly stated the introduction of inflation in the future to fund rewards to active participants (although this will ultimately be decided by the community). Near-term, the lack of inflation removes structural selling pressure but it’s important to consider the impact on adoption and outline key milestones for when inflation should be incorporated.
Tokens are allocated to the following groups (based on the whitepaper):
LPs (16%): While a portion of these tokens were carved out for participants in the early Liquidity Mining program and a retroactive airdrop, ~8% of tokens are reserved for ongoing Liquidity Mining within the Senior Pool
Backers (8%): Rewards for Backers who participate in Borrower Pools and who stake GFI on other Backers (not yet live)
Auditors (3%): While an Auditor system is not yet live, 3% of tokens are set aside for Auditor incentives
Borrowers (3%): Carved out for any future distribution system to Borrowers
Community Treasury (15%): Community-decided deployment, including grants and coverage for potential loan defaults
Early/Future Team (28%): Set aside for employees, advisors and contractors. Full-time contributor unlock schedules range from 4-6 years, while part-time contributors are subject to 3 year unlock schedules (all with initial 6-month lock-ups and 12-month transfer restrictions)
Warbler Labs (4%): Warbler Labs is a separate entity that was spun out of the early Goldfinch team that has, and will continue to, contribute to the Goldfinch community. Tokens are subject to a 3 year unlock schedule, with an initial 6-month lock-up and 12-month transfer restriction.
Early Supporters (22%): allocated to a group of 60+ early supporters who invested $37M to help build the protocol. These supporters are all long-term oriented and have 3-year unlock schedules, as well as an initial 6-month lock-up and 12-month transfer restriction
Other early contributors (<1%)
The following is an overview of the near-term Goldfinch roadmap based on GIP-06.
Goldfinch has a very ambitious vision - they believe it’s inevitable that all private debt will move on-chain and that private on-chain lending will be the norm. While there is a long - but achievable - road to that vision becoming true, Goldfinch recently published their protocol roadmap for the next 6-12 months. This includes all major projects framed across three different categories: engine (core protocol), access (ease and ability to use the protocol) and community (fostering community + enabling access).
Across each of those three dimensions, the team divided initiatives into intermediate and mid-term, defined as the next 6 months and 6-12 months, respectively.
The full roadmap can be viewed in detail here, but some of the key areas of development include:
Staking as coverage
Lock-up for voting power
Lead backer pools
Auditor system / origination fees
Referral program
To conclude, Goldfinch has plans to be the dominant decentralized credit protocol for crypto loans without collateral. There is a massive opportunity to open up access to the capital markets for borrowers around the world and match that demand with idle capital looking for a yield. Goldfinch’s design offers a promising glimpse of the benefits associated with a global, decentralized lending protocol where incentives are properly structured for all participants to drive optimal outcomes for lenders and borrowers.
** **If you want to learn more about Goldfinch, check out their documentation and guide to getting started.
As the DeFi ecosystem continues to mature there are a number of protocols/applications enabling users to borrow against their crypto portfolio, akin to borrowing against a stock portfolio in the traditional finance world. Even centralized exchanges like Coinbase and Binance let users borrow against crypto holdings today and receive funds nearly instantly.
That said, borrowing against a portfolio of crypto assets - or even equities for that matter - is inherently risky and users can be required to contribute incremental capital if the value of the underlying assets drops significantly (margin call). Risks aside, there are a number of benefits to borrowing on margin in DeFi: maintaining exposure to the underlying asset, avoiding a taxable event but even more importantly - near instant disbursement of funds and no cumbersome underwriting or KYC (know your customer) requirements.
But what options are available to people who don’t have a large enough crypto portfolio to borrow against?
These prospective borrowers are relegated to apply for a loan through traditional financial institutions. This often includes credit checks, supplying months of bank statements, KYC (or other equivalents) and restrictions on what loan proceeds can be used for. And that assumes borrowers even have access to a traditional banking system that can facilitate formal loan underwriting. Without even basic banking infrastructure in place, borrowers are forced to rely on other local/informal lenders with substandard and predatory terms. Today, it’s nearly impossible for borrowers to benefit from the massive improvements to lending in DeFi unless they have a large enough asset base.
What if there was a solution that (1) enabled borrowers to benefit from the ease, speed and simplicity or taking out a loan in DeFi - but without the over-collateralization and (2) permitted anyone in the world to earn a return on their capital, all while doing so at scale and with the right incentives in place to encourage responsible borrowing and repayment?
Enter Goldfinch. Goldfinch is a decentralized credit protocol for crypto loans without collateral and is focused on “expanding access to capital in emerging markets where crypto can truly power financial inclusion”
Underpinning that focus on expanding access to capital is Goldfinch’s core belief that there’s vast untapped lending potential in the world. The suppliers of capital (or lenders) are limited in their reach due to the constraints and friction of traditional lending channels, and yet there’s a massive group of individuals and institutions looking to earn yield on idle capital. Goldfinch’s focus is building out a platform that empowers anyone to be a lender, not just banks. (Source: Goldfinch)
Goldfinch is tackling this massive opportunity with a protocol built on the foundational principle of trust through consensus and frames the potential succinctly in the whitepaper:
The Goldfinch protocol creates a way for borrowers to show creditworthiness based on the collective assessment of other participants - or a way to crowd source assessing a borrower’s creditworthiness - rather than based on their crypto assets. The protocol can then use this collective assessment as a signal for automatically allocating capital. By removing the need for crypto collateral and providing a means for passive yield, the protocol dramatically expands both the potential borrowers who can access crypto and the potential capital providers who can gain exposure. (Source: Goldfinch)
To date, Goldfinch has served over 200K+ borrowers across India, Mexico, Nigeria and other countries, all while generating 10-14% yields for lenders.
Fundamentally, the protocol enables (1) Borrowers to borrow (or draw down) capital in the form of stablecoins from pools and exchange for local fiat and (2) lenders (both Borrowers and Liquidity Providers) to deposit assets in said pools to earn a return on their invested capital.
Each party interacting with the protocol will be covered in more detail below, but at a high-level they are:
Borrowers: Participants borrowing money; Borrowers propose “Pools” for Backers to evaluate and propose key terms of the Pool including amount, duration, interest rate, repayment schedule, etc.
Backers: Backers are one of two different types of lenders, allocating their capital directly to Pools of their choosing
Liquidity Providers: Liquidity Providers (LPs) represent the second type of “lender”; instead of funding Pools directly like Backers, LPs instead deposit capital into the “Senior Pool”. The Senior Pool contains LP capital only and sits senior (or ahead) of other lenders in the capital stack, meaning LPs have first claim on Borrower repayments
Auditors: The “gatekeepers” for all Borrowers; before Borrowers can actually borrow the funds, Auditors must validate the legitimacy of each Borrower, acting as an additional safeguard against collusion and/or fraudulent behavior
Originators: Participants who can - but aren’t required to - assist in the creation of Borrower Pools, helping propose terms in line with market expectations and facilitate the entire borrowing process
It’s important to note that both Backers and LPs are providing capital to borrowers, but LPs sit above Backers in the capital stack. By definition, LPs are indirectly funding the “senior tranche” of each Borrower Pool through their contribution to the Senior Pool - meaning they have first claim on repayments - while Borrowers fund the “junior tranche” with second claim on repayments.
Borrowers
Participants borrowing money; Borrowers propose “Pools” for Backers to evaluate and dictate key terms of the Pool including amount, duration, interest rate, repayment schedule, etc.
Each Pool that Borrowers propose is a smart contract through which Borrowers draw funds and make loan repayments with a unique set of financing terms (rate, term, funding cap, late fees, etc.). Just because a Pool is created doesn’t necessarily mean Backers will fund it - Borrowers must structure the terms in a way that offer strong enough risk-adjusted returns relative to the other Pools Backers can fund. To create a Pool, Borrowers are required to stake GFI, the Goldfinch governance token (covered in more detail later).
A counterpoint to Borrowers proposing pools is that Backers are more familiar with “market terms” for lending and leaving Borrowers to dictate terms could result in a poor user experience or a supply <> demand mismatch. The core belief for that not to be true is that Borrowers are more efficient at sourcing loans (e.g. identifying the specific use case for capital in say a smaller, less developed market) and that advantage offsets any downside from Borrowers “guessing” loan terms. (Originators also play a role in defining terms which is covered in more detail below).
Stepping outside of the protocol for a second and back to the traditional loan process today, loan underwriters conduct extensive diligence before approving a borrower, including credit history, employment and use of proceeds, among other things. This process helps lenders determine ability to repay, but equally as important - serves as information to go after borrowers for recourse in the event of nonpayment.
Borrower Incentives
Given the decentralized nature of the Goldfinch protocol and lack of “traditional” underwriting practices to diligence Borrowers, protocol incentives are designed to encourage proper behavior (e.g. repayment) and discourage irresponsible behavior. This includes:
Preventing Borrowers from borrowing additional funds once they’re in default until both Backers and LPs are made whole
Encouraging on-time repayment to establish a positive on-chain borrowing history (similar to building a credit report)
Leveraging off-chain agreements; while not supported by the protocol today, Borrowers and Backers can execute formal written agreements that enable Backers to seek recourse from Borrowers in the event of non-payment
Backers / Liquidity Providers (LPs)
Backers contribute capital directly to Borrower Pools based on the terms proposed by Borrowers. LPs - another “flavor” of Backers - instead contribute capital directly to the Senior Pool. The Senior Pool then algorithmically allocates LP capital across different Borrower Pools, enabling LPs to earn passive yield.
Borrower Pools are predominantly funded by Backers, but can also be “topped up” with capital from the Senior Pool (funded by LPs). The proportion of contributed capital from the Senior Pool is determined by the “Leverage Model” based on the amount of trust in the Borrower Pool. The more distinct Backers funding a given pool, the more “trust” there is in that pool, thereby increasing the capital contribution from the Senior Pool (known as applying leverage). As repayments are made by Borrowers, those flow back to the Senior Pool and, by default, the LPs who contributed capital, generating the passive yield. Specific construct/design of the Leverage Model isn’t covered in this piece, but details can be found here.
It’s easy to draw similarities between the protocol determining the “level of trust” based on distinct Backers and a real life scenario. For example, say you had leaking pipes at your house and required the expertise of a local plumber to fix it. No matter what, you want to find a plumber you trust to do a quality repair. One way to establish that trust is to ask others about the quality of work that the plumber completed for them. Maybe your neighbor used this same plumber a few months ago and the work was satisfactory. But that’s only one of the plumber’s clients - what if the other ten people the plumber worked with prior to your neighbor had awful experiences? To de-risk the possibility of incorrectly determining the “level of trust” in this plumber, you could call another five people who have worked with this plumber before to ask about their experiences (moving from n=1 to n=6).
Similar to the Leverage Model, by increasing the number of people willing to vouch for the plumber’s work (e.g. more distinct Backers willing to fund the Pool), you can increase your level of confidence - or trust - that the plumber will do quality work on your leaking pipes (e.g. the Borrower will repay the loan on time).
Backer + LP Incentives
Circling back to the breakdown of capital contributed by Borrowers and LPs to each Pool - capital from the Senior Pools (or LPs) is inherently lower risk as it has first claim on principal and interest repayments. To account for that lower risk, 20% of interest earned by the Senior Pool is reassigned to Backers - or the second-claim junior tranche. Additionally, 10% of all interest repayments are held back by the protocol and contributed to the reserve, meaning the Senior Pool earns 70% of the stated interest rate.
Per Goldfinch, the Senior Pool earns an effective interest rate equal to 70% of the nominal interest rate. Or, in terms of the nominal interest rate (nominal), protocol reserve allocation (p) and junior reallocation percent (j):
Senior Pool interest rate = nominal interest rate * (1 - p - j)
On top of rewards generated by the (1) Pool’s stated yield and (2) 20% share of interest from the Senior Pool, Backers also have the opportunity to earn GFI for being an early Pool backer. The earlier the Backer is to a Pool, the greater the GFI rewards. The earliest Backers are taking the highest risk since there isn’t yet a “collective stamp of approval” from a lot of Backers funding the Pool - therefore these early Backers must be compensated accordingly. The early-backer rewards reduce over time as the number of committed Backers increases and perceived risk decreases. Backers have full rights to the GFI granted, but it is not immediately redeemable. An increasing portion of GFI is redeemable as Borrowers repay capital, incentivizing Backers to support only quality Borrower Pools.
Backers are also incentivized to stake their GFI on other reputable Backers. Per the whitepaper:
In addition to evaluating individual Borrower Pools, Backers may also evaluate other Backers in order to give them leverage. Backers can do this by staking GFI directly on another Backer. When GFI is staked on a Backer, that GFI serves as collateral against potential defaults for that Backer’s positions in Borrower Pools. When a Borrower defaults, the GFI staked on all the Backers in that pool are reallocated to the senior tranche until the senior tranche is made whole on their expected payments.
To summarize, the rewards paid out to Backers and LPs solely by funding the Pool is outlined in the diagram below and includes:
Backers
Repayments of principal and interest (second claim)
20% interest reassigned from the Senior Pool
GFI rewards from being an early Pool backer and/or staking GFI on other reputable Backers
LPs
Repayments of principal and interest (first claim)
70% of the stated/nominal interest rate for a given Pool
Also eligible for additional liquidity mining rewards which are covered in more detail below
Auditors
Auditors are the “gatekeepers” for all Borrowers. Before Borrowers can borrow funds, Auditors are required to validate the legitimacy of Borrowers, acting as an additional safeguard against collusion and/or fraudulent behavior by Borrowers. Note that the Auditor construct isn’t yet live in the protocol today and the Goldfinch team is serving as this final checkpoint in the interim.
In an effort to exclude Borrowers with ill-intent from participating in the protocol, each Borrower must receive an “approval vote” from Auditors before drawing down any capital from the Pool. As noted in the whitepaper, Auditors are not evaluating the Borrower’s creditworthiness but instead providing confirmation that the Borrower does what they claim to do and there is no collusion with other participants (e.g. a Ponzi scheme where funds borrowed from one Pool are used to support repayments to another Pool). To prevent this and other types of collusion, Auditors are required to (1) undergo an entity check and confirm their true identity and (2) stake GFI that can be slashed if an Auditor acts erroneously (specifics on the auditor process can be found here).
Originators
Participants that can - but aren’t required to - partner with Borrower Pools to dictate terms and source those Pools for the protocol.
Goldfinch currently reviews all Borrower Pools before opening up to Backers and LPs. While it’s crucial to have this level of centralized decision-making in the near term to control for quality, this doesn’t fully align with the broader ambitions of empowering anyone in the world to be a lender. Originators are similar to scouts, advising Borrowers on terms and helping onboard them to the protocol. For example, someone working as part of a local small business advocacy group could specialize in helping get local businesses (or Borrowers) onboarded onto the protocol and set repayment terms, enabling anybody in the world to lend to these local businesses (Backers). In exchange for their services, Originators are paid a fee - defined as a percentage of interest on the borrowings - and that fee is repaid after paying LPs (senior tranche) and Backers (junior tranche), meaning Originators are incentivized to only onboard high quality Borrowers.
GFI is the Goldfinch protocol token and is used today for community governance and participant incentives. The token is limited to these two uses cases for now, but there are additional future use cases (per the whitepaper):
Participant Incentives: Backers who supply to Borrower Pools and stake on other Backers, Auditors who stake to participate in votes and Borrowers who successfully repay their pools
Backer Staking: Backers can stake their GFI tokens on other Backers in order to give them additional leverage when participating in Borrower Pools. This GFI also serves as a backstop against potential loan defaults
Auditor Votes: Auditor votes are required to grant Borrowers permission to borrow from the protocol, and Borrowers pay for these votes with the GFI token
Auditor Staking: Auditors stake the GFI token in order to be selected to participate in Auditor Votes
Community Grants: The community can decide to provide grants to participants that meaningfully contribute to the Goldfinch protocol and ecosystem
The remainder of this section will further explore the role of GFI in community governance and liquidity mining incentives.
Governance
Governance is managed by a community DAO and has the ability to perform maintenance functions and adjust other parameters of the protocol, including:
Upgrading contracts
Changing protocol configurations and parameters
Selecting Unique Entity Check providers
Setting the rewards and distribution of GFI
Pausing protocol activity in the event of an emergency
Liquidity Mining Incentives
As a reminder, LPs supplying capital to the Senior Pool can be thought of as “passive investors” and earn a return on their capital through the form of (1) Borrower repayments and (2) GFI rewards. Borrower repayments are relatively straightforward, but the following sections specifically covers GFI rewards for LPs.
When LPs supply capital to the Senior Pool they receive a proportional amount of FIDU - an ERC-20 token representing committed capital. FIDU can be redeemed for USDC at any point based on the total value of the Senior Pool, but the redemption rate is variable and is least favorable at the point of the Pool’s inception. This exchange rate becomes more favorable as time progresses, incentivizing LPs to keep their capital in the Senior Pool.
Once LPs have FIDU they can then turn around and stake that FIDU for GFI rewards. Based on the whitepaper, GFI rewards are granted at a variable distribution rate which acts as a balancing mechanism to ensure the target Senior Pool total balance set by Governance remains consistent.
In a scenario where the Senior Pool is under the target balance, the GFI issuance rate increases to compensate for that shortfall - and incentivizes LPs to put in more capital to the Senior Pool until equilibrium is reached. Conversely, if the Senior Pool balance is over the target, the issuance rate will decline and incentivize LPs to take money out and invest it elsewhere. As outlined by Goldfinch, this mechanism “helps incentivize a healthy utilization and APY for the pool, relative to loans outstanding.”
Community governance ultimately determines the issuance rate at which GFI is granted to LPs, but is influenced by:
Target Senior Pool Balance: Target is based on expected future capital needs. Should be high enough to attract the required capital, but not too high where the protocol is unnecessarily distributing GFI to capital sitting on the sidelines
Target Range: Range around the “Target Balance” along which the min and max distribution rates are applied. It is represented as two percentages (e.g. min: 50% of the target balance, max: 200% of the target balance). Described in more detail below
Minimum/Maximum Rate: The lower and upper bounds of GFI distributed per second.
Similar to how the FIDU <> USDC exchange rate is less favorable initially to incentivize LPs to keep their funds invested, there is a similar construct applicable to GFI earned from staking FIDU - GFI distributions earned by LPs from liquidity mining unlock linearly over the first twelve months and any LPs withdrawing their capital from the Senior Pool will forfeit unearned GFI distributions.
The diagram below articulates the linear function of the reward rate, which increases as the Senior Pool balance is below the target - driving capital inflows - and declines if the Senior Pool balance is above the target - incentivizing withdrawals:
Today, the target range is $50-200M, target balance of $100M and a maximum issuance rate of 0.5% of GFI supply per month (minimum is zero).
To summarize, the liquidity mining program enables LPs to earn FIDU proportional to capital committed and stake that FIDU to earn GFI rewards at a variable % APY.
Initial GFI supply is capped at 114,285,714 tokens. Today there is no inflation, but the Goldfinch team has explicitly stated the introduction of inflation in the future to fund rewards to active participants (although this will ultimately be decided by the community). Near-term, the lack of inflation removes structural selling pressure but it’s important to consider the impact on adoption and outline key milestones for when inflation should be incorporated.
Tokens are allocated to the following groups (based on the whitepaper):
LPs (16%): While a portion of these tokens were carved out for participants in the early Liquidity Mining program and a retroactive airdrop, ~8% of tokens are reserved for ongoing Liquidity Mining within the Senior Pool
Backers (8%): Rewards for Backers who participate in Borrower Pools and who stake GFI on other Backers (not yet live)
Auditors (3%): While an Auditor system is not yet live, 3% of tokens are set aside for Auditor incentives
Borrowers (3%): Carved out for any future distribution system to Borrowers
Community Treasury (15%): Community-decided deployment, including grants and coverage for potential loan defaults
Early/Future Team (28%): Set aside for employees, advisors and contractors. Full-time contributor unlock schedules range from 4-6 years, while part-time contributors are subject to 3 year unlock schedules (all with initial 6-month lock-ups and 12-month transfer restrictions)
Warbler Labs (4%): Warbler Labs is a separate entity that was spun out of the early Goldfinch team that has, and will continue to, contribute to the Goldfinch community. Tokens are subject to a 3 year unlock schedule, with an initial 6-month lock-up and 12-month transfer restriction.
Early Supporters (22%): allocated to a group of 60+ early supporters who invested $37M to help build the protocol. These supporters are all long-term oriented and have 3-year unlock schedules, as well as an initial 6-month lock-up and 12-month transfer restriction
Other early contributors (<1%)
The following is an overview of the near-term Goldfinch roadmap based on GIP-06.
Goldfinch has a very ambitious vision - they believe it’s inevitable that all private debt will move on-chain and that private on-chain lending will be the norm. While there is a long - but achievable - road to that vision becoming true, Goldfinch recently published their protocol roadmap for the next 6-12 months. This includes all major projects framed across three different categories: engine (core protocol), access (ease and ability to use the protocol) and community (fostering community + enabling access).
Across each of those three dimensions, the team divided initiatives into intermediate and mid-term, defined as the next 6 months and 6-12 months, respectively.
The full roadmap can be viewed in detail here, but some of the key areas of development include:
Staking as coverage
Lock-up for voting power
Lead backer pools
Auditor system / origination fees
Referral program
To conclude, Goldfinch has plans to be the dominant decentralized credit protocol for crypto loans without collateral. There is a massive opportunity to open up access to the capital markets for borrowers around the world and match that demand with idle capital looking for a yield. Goldfinch’s design offers a promising glimpse of the benefits associated with a global, decentralized lending protocol where incentives are properly structured for all participants to drive optimal outcomes for lenders and borrowers.
** **If you want to learn more about Goldfinch, check out their documentation and guide to getting started.
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