Goldfinch Finance: An Overview

The DeFi Ecosystem Today

The DeFi ecosystem is currently made up of a thriving set of protocols harnessing the ability of blockchains to provide a more decentralized, transparent and accessible access to Borrowing/Lending, Staking, Exchanges and Structured Products (Options, perpetuals etc…) However, amongst this ecosystem, another crucial piece is the intersection of Real-World Assets (RWA’s) and DeFi. By bringing these two together, real world problems can be solved in a more transparent, efficient and accessible way.

If we zoom into the massive market that is borrowing/lending today (in TradFi & DeFi) - there’s two major problems that can be identified:

1) Barriers to Borrowing & Lending: It is difficult for people in developing/poor economies to borrow whereas lending on the other hand is taken care of by banks and accredited investors. Therefore the barriers to borrowing and lending are high.

2) Overcollateralization in DeFi: Majority of DeFi protocols require overcollateralization which means that individuals have to put up more collateral than the loan they receive (collateral > loan). This limitation results in crypto natives borrowing to speculate in the crypto markets and leaves a majority of individuals with real needs to be met -underserved due to insufficient access to capital.

Step in - Goldfinch Finance

Goldfinch Finance is was built with the aim to achieve DeFi’s core goal of expanding financial access. It’s a decentralized credit protocol which brings crypto loans to the real world. Goldfinch enables zero-collateral loans, which means that no on-chain collateral is required to borrow. The protocol employs a “trust through consensus” mechanism approach which allows lenders to evaluate the creditworthiness of potential borrowers directly - removing the need for on-chain collateral. This creates a bridge for users with surplus capital to users in need of capital, expanding the number of potential borrowers and opening access to lending in more equitable ways by harnessing the qualities of DeFi.

Furthermore, by offering loans to non-crypto native - Goldfinch brings returns that are tied to real world commerce and therefore uncorrelated to the downturns in the crypto market which can in-turn affect the demand for loans. The project has been experiencing exponential growth serving 1 million individuals and businesses across three continents and 20+ different countries. This is backed up by the ~ $100 million in Active Loans as seen in the chart below.

@goldfinch - Dune
@goldfinch - Dune

The network was built to achieve the expansion of financial access by first reaching to borrowers who’d benefit from crypto the most - emerging markets. As can be seen below - Goldfinch is currently enabling greater financial access to individuals in 20+ countries starting with those with limitations to capital access. This is primarily made up of lending businesses that lend to an end borrower or debt funds. Goldfinch has made significant strides in partnering with companies from various jurisdictions with majority of exposure to developing economies such as Asia, South America and Africa. The protocol aims to grow these partnerships to developed economies to expand its impact and success.

@goldfinch - Dune
@goldfinch - Dune

How the Protocol Functions:

The primary stakeholders key to the way the protocol functions are:

1) Borrowers: propose terms in order to access capital

goldfinch.finance
goldfinch.finance

2) Investors: supply capital to the protocol

  • Backers: evaluate deals to determine which junior tranches to supply capital. They supply first-loss capital to the (Junior Tranche) and thus take on more risk and earn more yield.
goldfinch.finance
goldfinch.finance
  • Liquidity Providers (LP’s): supply excess capital into a shared pool (Senior Pool) that is automatically distributed across the protocol as determined by the decision of the backers. LP’s receive passive yield in return and a portion of their interest earned is sent to the Backers.
goldfinch.finance
goldfinch.finance

Therefore, borrowers seeking to access capital can propose a loan deal which is evaluated by Backers to determine whether or not they will lend capital to the borrower. If the Backer chooses to invest, the Senior Pool automatically provides Liquidity Providers' capital in line with the amount lent directly by Backers. The Borrower can then gain access to the funds.

goldfinch.finance - Key Stakeholder Relationships
goldfinch.finance - Key Stakeholder Relationships

GFI Tokenomics and Design

What purpose does the $GFI Token serve?

$GFI is the native governance token for the Goldfinch Network. Holders of GFI can vote to make various updates/adjustments to the parameters of the protocol, through community governance and therefore help manage the DAO.

GFI also serves as a key incentive mechanism for the players in the protocol. The participation of Auditors, Backers, and Liquidity Providers are incentivized by the token distributions in the for of $GFI rewards.

  • Auditors are rewarded with $GFI for honest participation/voting and are incentivized to stake their $GFI or risk having it slashed
  • Backers provide first-loss capital to the borrower pools, and earn $GFI rewards for doing so. They can receive additional rewards when staking on other backers.
  • Liquidity Providers supply to the Senior pool and earn passive yields

The initial token supply is capped at 114,285,714 GFI tokens.

GFI Allocation:

Goldfinch Finance - Tokenomics
Goldfinch Finance - Tokenomics

Additionally, Goldfinch’s revenue model functions with the protocol keeping 10% of interest payments in its reserves. Redemptions from the Senior Pool also incur a 0.5% fee which accrues to the protocol treasury. Over the past 30 days the protocol has earned ~ $96,000 in fees which shows steady growth in revenues and reserves.

@goldfinch - Dune
@goldfinch - Dune

Challenges/Risks

Although Goldfinch has created a unique protocol that addresses important obstacles, it does have a fair share of risks/challenges as any protocol in the space does.

1) Credit Risk: The possibility of the borrower failing to repay the loan resulting in a default is one that cannot be overlooked. Being an undercollateralized lending protocol, Goldfinch uses a an incentive structure to minimize the risk of fraud. However, this still requires a certain degree of trust in the parties involved.

2) Regulatory Risk: Since Goldfinch deals with companies from several jurisdictions - regulatory scrutiny could play a role

3) Incentive Risk/challenge: The protocol has a well-designed incentive structure that aligns the interests of key players. However, it’s important that the incentives are sustainable to continue the crucial process of performing borrower due diligence which is done by backers and auditors.

4) Smart Contract Risk: Although this is a key risk for most DeFi/Web3 protocols, it may not be as apparent for Goldfinch since the protocol does not rely on smart-contract innovation.

Conclusion

The promise of crypto is to unlock equal access and opportunity - not only to large banks, Silicon Valley and crypto-natives but to individuals worldwide. This is the future Goldfinch is realizing as evidenced by their progress in < 2 years:

  • Over 1M reached with USDC via Borrowers, across 20+ countries

  • Over $100M in USDC loaned

  • $1M in protocol revenue

    The above metrics and many more can be seen in this Dune Dashboard by Goldfinch

By bringing “crypto-loans to the real-world”/bringing real-world yields to crypto, Goldfinch is bridging these two worlds together to create fair, transparent and accessible one for all.

Sources & Interesting Reads:

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