Breakthrough in the world of cryptocurrency loans or what is Goldfinch.
Goldfinch is a decentralized protocol that allows for crypto borrowing without crypto collateral.
What is the difference between Goldfinch and other crypto lending protocols?
A core limitation of current crypto lending protocols is that they require overcollateralization with crypto, which prevents the vast majority of borrowers in the world from participating. By incorporating the principle of “trust through consensus”, the Goldfinch protocol creates a way for borrowers to show creditworthiness based on the collective assessment of other participants rather than based on their crypto assets.
The Goldfinch protocol has four core participants:
Backers — Participants who supply junior tranche (first-loss) capital to individual Borrower Pools.
Borrowers — Participants who raise capital from the protocol via Borrower Pools.
Liquidity Providers — Participants who supply capital to the Senior Pool
Auditors — Participants who receive GFI rewards for securing the protocol with a human eye.
The scheme of the protocol can be understood from the infographics below.
In this article, I want to understand the roles Senior Pool LP and Backers.
Liquidity Providers supply capital to the Senior Pool in order to earn passive yield. The Senior Pool uses the Leverage Model to automatically allocate capital to the Borrower Pools, based on how many Backers are participating in them.
When the Senior Pool allocates capital, a portion of its interest is reallocated to the Backers. This increases the Backers’ effective yield, which incentives them to both provide the higher-risk first-loss capital and do the work of assessing Borrower Pools.
Borrower Pools have both a junior and senior tranche. Backers supply capital to the junior tranche, and the Senior Pool supplies capital to the senior tranche.
When a borrower makes repayments, the Borrower Pool applies the amount first toward any interest and principal owed to the senior tranche at that time, and then toward any interest and principal owed to the junior tranche at that time. To track the different amounts that different participants supply, both the Backers and the Senior Pool receive an NFT when they supply capital. The NFT tracks the amount that was supplied and how much of it has been redeemed.
At any time, a Backer or the Senior Pool can use their NFT to redeem their specific portion of the available repayments in the pool. The Borrower Pools use NFTs rather than fungible tokens because it allows the protocol to ensure that no one redeems more than their proportional share of the total repayments as they come in.
Senior Pool — Smart contract that accepts capital from Liquidity Providers and automatically allocates capital to the senior tranche of Borrower Pools according to the Leverage Model.
Backers evaluate Borrowers and supply first-loss capital on their Borrower Pools. Backers can achieve higher returns when the Senior Pool leverages them with additional senior tranche capital.
Backers have an incentive to provide first-loss capital to Borrower Pools because they can receive both early Backer rewards and higher effective yields based on the Senior Pool leverage. They also have an incentive to stake GFI on other Backers because they can earn additional rewards when that Backer supplies to Borrower Pools.
