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What is Goldfinch Protocol?

2022-10-17 13:00:00

What is Goldfinch Protocol?

Goldfinch is a decentralized credit mechanism that enables crypto borrowing without the use of cryptocurrency collateral. In a nutshell, Goldfinch is a decentralized, globally accessible credit system with the goal of bringing the world's credit activities onto the blockchain while improving access to money and supporting financial inclusion. The Goldfinch protocol incorporates the notion of "trust through consensus," allowing borrowers to demonstrate trustworthiness based on the collective assessment of other participants rather than their crypto assets. The protocol makes crypto loans without requiring crypto collateral, which is the missing component that will ultimately allow most individuals throughout the world to gain access to bitcoin capital. By embracing the notion of trust through consensus, Goldfinch enables borrowers to demonstrate trustworthiness based on the collective evaluation of other participants rather than over-collateralization with crypto assets. This lays the groundwork for developing an irreversible, on-chain credit history, a critical component of any scalable lending scheme and a primitive that many growing economies worldwide lack in a meaningful way. Goldfinch protocol uses collective assessment as a signal for allocating capital.

Goldfinch Protocol

Goldfinch's decentralized community of investors makes loans to businesses that stimulate economic growth in their respective regions, beginning with those in emerging economies. All loans on Goldfinch are currently fully collateralized with off-chain assets. The protocol significantly expands the potential borrowers who may access crypto and the potential investors who can acquire exposure by eliminating the need for coin collateral and offering a way for automatically distributed rewards.

Goldfinch Participants

The three main roles in the Goldfinch protocol are investors, borrowers, and auditors. The Goldfinch documentation contains further information about these roles and their incentives (APYs, awards, etc.) incentives (APYs, awards, etc.) they provide.

1. Investors: 

Participants in the protocol who contribute USDC for Borrowers to use are known as Investors. You can invest in Goldfinch in one of two ways: as a backer or as a liquidity provider.

2. Backers:

Backers optimize for yield and specificity. They evaluate specific Borrower Pools, decide whether to invest directly in them with first-loss capital and receive the protocol's best yields as a result.

3. Liquidity Providers (LP):

Liquidity providers optimize liquidity and diversification. They provide the Senior Pool with second-loss capital, and the Senior Pool automatically distributes its funds across all Borrower Pools in accordance with the Backers' evaluation. You can read more about Senior Pool on Goldfinch's official documentation.

4. Borrowers:

Participants who request financing from Goldfinch are known as Borrowers, and they submit Borrower Pools for evaluation by the network. Borrower Pools are smart contracts that include the loan terms that a Borrower wants, such as the interest rate and repayment timeline.

5. Auditors:

Auditors must approve Borrowers before they may propose a Borrower Pool to Backers. The protocol selects auditors at random to give a human-level check to protect against fraudulent activity and to earn rewards in exchange for doing so.

How does Goldfinch work?

Borrowers (currently off-chain lending enterprises) offer the protocol agreement terms for credit lines (Borrower Pools). Goldfinch's Investor community can then offer capital to these credit lines (Pools), either directly to particular Pools (as Backers) or indirectly by allocating capital across the protocol (Liquidity Providers via the Senior Pool).

These Borrower companies use credit lines to withdraw stablecoins from their Pool, primarily USDC. Then, the borrowers convert the USDC into fiat money and distribute it locally to end borrowers in their local markets. In this approach, the protocol offers the benefits of cryptocurrencies, namely their accessibility to the capital on a global scale, while leaving the actual origination and servicing of end-borrower loans in the hands of local enterprises that are best suited to perform such tasks.

Trust through Consensus

The protocol applies the idea of "trust through consensus" to decide how to distribute capital from the Senior Pool. Accordingly, even while the protocol does not trust any particular Backer or Auditor, it does trust the collective activities of a large number of individuals. At a high level, the Senior Pool improves the ratio with which it adds leverage as more Backers contribute to a specific Borrower Pool. This strategy counts each Backer separately, hence the protocol needs to make sure a different person indeed represents each Backer. As a result, in order to participate, all Backers, Borrowers, and Auditors must pass a "unique entity check."

Goldfinch Native Token

GFI and FIDU are the two native tokens on Goldfinch. Both adhere to the ERC20 standard. Goldfinch protocol also employs stablecoins, currently solely USDC, for investment and lending. GFI is the primary native token of Goldfinch. GFI can be put into a Member Vault to get a portion of protocol income in exchange for securing the protocol's expansion. It is utilized for governance voting, auditor staking, auditor vote rewards, community grants, staking on backers, and protocol incentives. FIDU is a token that represents a deposit made to the Senior Pool by Liquidity Providers. When a Liquidity Provider feeds the Senior Pool, they are compensated with FIDU. In the Goldfinch decentralized application, FIDU can be redeemed for USDC at an exchange rate based on the net asset value of the Senior Pool, less a 0.5% withdrawal fee. As interest payments are transferred back to the Senior Pool, the exchange rate for FIDU rises over time.

Key Borrower Repayment Incentives

  1. When pitching pools to Backers, Borrowers must disclose their wallet addresses, making their on-chain history accessible to all potential creditors, even those who are not on the blockchain. As more global banking moves on-chain, building a bad on-chain credit history is similar to building a bad off-chain credit score or record for future credit possibilities.
  2. It's conceivable that borrowers will want to keep borrowing from Goldfinch. Borrowers are prohibited from taking out additional loans from any Borrower Pool as soon as one of their payments is late.
  3. Although occasional defaults are typical in finance, Backers are unlikely to provide more cash to any of a Borrower's pools if the Borrower is routinely late on repayments. It is up to the Backer to determine whether Borrowers are suitable and have a strong enough track record to warrant Backer investment in any future pools proposed by the Borrower.
  4. Although not specifically encouraged by the protocol, Backers may enter into off-chain contracts with Borrowers, such as forcing them to use off-chain assets as security for their on-chain loans. In order to be willing to provide funds, Backers may need that such an arrangement in place, either with them directly or with another Backer. Another significant incentive for borrowers in these situations is the legal agreement and potential Investor recourse. At the moment, this approach is used to fully collateralize all loans on Goldfinch with off-chain assets.

Summary

Goldfinch was developed to bring real-world investment to decentralized finance. The Goldfinch protocol incorporates the notion of "trust through consensus," allowing borrowers to demonstrate trustworthiness based on the collective assessment of other participants rather than their crypto assets. Goldfinch's decentralized community of investors makes loans to businesses that stimulate economic growth in their respective regions, beginning with those in emerging economies. 

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