Goldfinch

Goldfinch is one of the innovators taking advantage of this market opportunity using crypto-economic incentives and decentralized credit assessment processes. Goldfinch is a decentralized credit platform for collateral-free cryptocurrency loans.

Let’s look at the basic lending scheme in Goldfinch protocol.

Thus, funds for the Borrower Pool are aggregated from Sponsors (junior tranche) and Liquidity Providers (senior tranche).

Junior and Senior tranches

Borrower pools have both junior and senior tranches. Sponsors provide capital to the junior tranche and the Senior Pool provides capital to the senior tranche. When a borrower makes payments, the Borrower Pool first transfers the amount to any interest and principal due to the Senior Tranche at that time and then to any interest and principal due to the Junior Tranche at that time. In this way, the Liquidity Providers receive their smaller, risk-free investment income. The Sponsors’ returns are higher and involve more risk.

There may be certain participants who work with the Borrowers to set the terms and put them on the record. To compensate them for this effort, Borrower Pools maintain an issuance fee that is paid to the initiator of the pool. The issuance fee is determined as a percentage of the interest. To align incentives with capital providers, the originator fee is treated as the youngest tranche, so each payment goes first to what is owed to the senior pool and Sponsors before it goes to the origination fee.

The scheme is rather confusing.

Let’s take a closer look at each of the 4 participants in this process: Sponsors, Liquidity Providers, Auditors, Borrowers.

1 Sponsors evaluate borrower pools and decide whether to grant them first-loss capital. After sponsors provide capital, borrowers can borrow and reproduce their law through a pool of borrowers. Sponsors interact with borrowers, looking for all the information they need to entrust their money only to people they trust. They themselves have a vested interest in the success of the borrowers and the earliest possible repayment of the borrowed funds.

2 Borrowers are participants who are looking for financing, and they offer pools of borrowers for investors to evaluate. Borrower pools contain terms and conditions that the borrower is looking for, such as the interest rate and repayment schedule. Having terms and conditions does not guarantee that the pool will be successful and consistent. The borrower must be interested in the Sponsors and must be approved by the Auditors. The plus side of Schengel is that even someone with very little money can be a borrower.

3 Liquidity Providers — provide capital to the Senior Pool for passive income. The senior pool uses a leverage model to automatically allocate capital between pools of borrowers depending on how many investors are involved. When the senior pool distributes capital, a portion of its share is redistributed among investors. This increases the profitability of the Sponsors, which encourages them both to provide capital to cover the first loss (with increased risk) and to do the work of evaluating the borrower pools. The liquidity providers themselves don’t puzzle over which pool to choose. They don’t. It’s the closest thing to a classic investment. Less risk and less profit.

4 Auditors — vote to approve capital for the Borrowers, which is necessary before they can borrow capital. Auditors are chosen by protocol (randomly), and they provide human-level verification to protect against fraud. Without the auditors’ approval, no pool will move from its seat. Their role is extremely important. They eliminate the fact that there is a collision between participants in the protocol and improve it.

Real Life Applications

There is no doubt about it. There are already results in emerging markets — they immediately show the effectiveness of the project as a litmus test. Goldfinch is proud to report that the protocol was launched in December with several reputable credit companies, including PayJoy in Mexico, QuickCheck in Nigeria, and many others to be announced later. All of them have long-term high performance and are looking to grow, now with crypto. All of this gives hope for the success of the Goldfinch protocol.