Goldfinch

Goldfinch is a Decentralized Finance (DeFi) credit platform that loans out cryptocurrency to users without requiring that they have crypto collateral themselves. This allows the company to provide access to cryptocurrency to emerging markets and to offer a stable yield to the lenders.

The company was co-founded in July 2020 by Michael Sall and Blake West, who both formerly worked at Coinbase. According to its whitepaper, Goldfinch's lending model relies on four core participants: borrowers, backers, liquidity providers, and auditors. This protocol is intended to allow for cryptocurrency borrowing without borrowers needing cryptocurrency collateral.

In Goldfinch's lending model, borrowers are the participants seeking financing. To begin the process, borrowers propose borrower pools, which define the terms of their loan, such as interest rate and repayment plan. Borrower pools are then assessed by backers, parties who decide whether or not to provide first-loss capital. If approved, borrowers may continue to borrow and repay through the borrower pools.

Architecture Diagram for Goldfinch's lending model.

Liquidity providers supply capital to the senior pool, allowing them to earn a passive yield. This senior pool automatically allocates capital to the borrower pools, based on the number of participants, by using a Leverage Model. This increases the backers' effective yield and incentivizes them to provide the first-loss capital in the beginning. The final participants, auditors, vote to approve borrowers, a required step before they can join the borrower pools.

As of 2021, Goldfinch is not yet available to use within the United States. The company offers loans and financing in Mexico, Nigeria, India, and Singapore through its partnerships with Payjoy, Quickcheck, and ALMA. The website promises that more partnerships will be available in the future.

However, as it waits for approval in the United States, Goldfinch has grown to an outstanding loan volume to over $38 million in early 2022, and the protocol is serving over 200,000 borrowers in eighteen countries, with capital for a range of uses—including motorcycle taxis in Kenya, financing small businesses in Brazil, and providing eco-friendly cookstoves for low-income households in India, to name a few. The following are total active loans by country, as of January 2022:

Active loans by country in January 2022.

The creation of the borrower pool is a smart contract. Through this tool, borrowers can borrow and repay capital. Any borrower is capable of creating a borrower pool, and in turn they can set the terms of the pool, such as the interest rate, the total capital that can be borrowed, the repayment period, the term, and any late fees. In this way, the borrower pool is more like an offer sheet to potential lenders, and the creation of such a sheet does not guarantee that a lender will agree to their terms.

Further, borrowing is broken into two tranches. The first tranche, the junior or first-loss tranche, is what borrowers need to convince backers to supply. The amount the borrower is lent is then based on this supply, combined with the amount the senior pool allocates. This second part of the loan, the senior tranche or senior pool, is the amount allocated based on Goldfinch's Leverage Model. As borrowers are trying to convince backers to lend, they are incentivized to impose reasonable caps on their borrowing.

Further, in order to create a borrower pool, the borrower is required to stake an amount of GFI equal to double the cost of an auditor approval, which is a fixed rate set by the protocol. This is done in order to help guard Goldfinch against spam by signaling to backers that the borrower is serious. The first half of the staked GFI is used for the first auditor approval, while the borrower is able to redeem the remaining staked GFI when they have repaid their balance.

With the architecture of the borrower pool, Goldfinch uses NFTs rather than tokens. This is to allow the company to ensure that backers can only redeem a proportional share. For example, if two backers have supplied equal amounts to a loan, and the borrower has paid back a portion of that loan, the backers are only entitled to a 50 percent portion of the principal paid back.

1. Backers may form off-chain legal agreements with borrowers (but while not explicitly supported by the protocol). Backers may require such an agreement to be in effect, either with them directly or with another backer, in order to be willing to supply capital. In these cases, the legal agreement and potential recourse are other important incentives for borrowers.

2. Borrowers need to publicize their address when proposing pools to backers; their on-chain history becomes public to future creditors (even those off-chain).

Backers are responsible for evaluating borrowers and supplying the first-loss capital to the borrower pools. Backers also achieve better returns when the senior pool leverages them with a senior tranche pool. In this model, the backer evaluates the proposal of a given borrower pool, and in the case in which they find the terms agreeable, will provide capital to the junior tranche of the pool. If senior tranche capital is attached to the borrower pool, the junior tranche is reallocated with 20 percent of the senior tranche's nominal interest to represent the higher risk in the junior tranche. The protocol retains 10 percent of all interest payments as reserves. These reserves are managed by the decentralized governance.

In the case of a borrower pool that borrows $1 million with a 15 percent interest rate, with a 1-year term, in which the backers supply $200,000, and the senior pool allocates the remaining $800,000, results in $150,000 in interest. Of that interest, the senior pool receives $84,000, or 10.5 percent interest; the backers receive $51,000, or 25.5 percent interest; the remaining $15,000 is the 10 percent protocol reserve allocation.

In order to incentivize backers to be the first one in a borrower pool and supply earlier, the protocol provides a GFI reward to backers who contribute early. The reward diminishes as more backers supply a borrower pool, until a specified limit is reached. This is to solve the problem of confidence, or lack of, in borrower pools that have not yet received backing.

The reward is not immediately claimable, but rather is proportional to the percentage of the full expected repayment of principal plus interest that is successfully repaid. This means the reward is only given to the backer after the borrower pool proves valuable to the protocol and to ensure backers are not supplying borrower pools for the reward alone, but are properly evaluating the borrower pool before supplying.

Other than evaluating borrower pools, backers are also able to evaluate other backers. This allows them to give other backers leverage by staking GFI on another backer. The amount of staked GFI on a backer is then used for the senior pool and the leverage model to calculate a leverage ratio and allocate capital whenever that backer supplies to borrower pools. Such that if a borrower has a 4 times leverage ratio, the senior pool will allocate four times the amount they supply to a given borrower pool.

As the name suggests, liquidity providers supply capital to the senior pool to earn passive yield. The senior pool then allocates capital among the senior tranches of borrower pools according to the Leverage Model. This can provide both diversification to the senior pool and seniority to the first-loss capital of backers. The process of senior pools allocating capital to senior tranches does not involve seeking the permission of different borrowers, nor does it involve any evaluation of the borrower pools, as that is the responsibility of the backers.

When liquidity providers supply to the senior pool, they receive an equivalent amount of the ERC20 token FIDU. The FIDU token can be redeemed for USDC at an exchange rate based on the net asset value of the senior pool, minus a 0.5 percent withdrawal fee. This exchange rate matures as interest payments are made back to the senior pool. It is also possible that when a liquidity provider wants to make a withdrawal, there may not be sufficient USDC because it has been borrowed. If this happens, liquidity providers have to return when new capital enters the senior pool through repayments or new liquidity providers.

Auditors are responsible for performing human-level checks on borrowers to confirm they are legitimate in order to further secure the protocol against fraud. Borrowers require the approval of auditors to borrow from borrower pools. For auditors, they are required to stake GFI in order to be selected for votes, and then they earn GFI rewards when they vote with the majority of the other auditors.

Auditors can be anyone, so long as a minimum of GFI has been staked and the individual has passed the Unique Entity Check. In the event of a vote being requested, nine auditors are selected on a random weighted basis, which is based on the amount of GFI auditors have staked. If selected, an auditor is then responsible for evaluating if a borrower seems to be legitimate and provide a confirmation that the borrower does what they claim and do not appear to be colluding with other participants.

To achieve this audit, auditors can do whatever needs to be done, including reviewing off-chain documents provided by borrowers, and communicate with borrowers directly. The protocol only requires the final vote from the auditors. In order to request such a vote, the potential borrower has to stake enough GFI to reward auditors for their vote. If more than two auditors vote "no," the GFI staked amount is slashed.

In the case of a vote, auditors have forty-eight hours to provide a "yes," "unsure," or "no" vote. Their GFI is slashed if they fail to vote in the forty-eight hour window or if they vote against the majority. If auditors vote "unsure," there is no penalty and also no reward. The vote offers three potential outcomes:

1. Full approval—this occurs when a borrower pool achieves at least six "yes" votes and no more than one "no" vote. This acts as an approval, and senior pool can be allocated to the borrower pool.
2. Backer-only approval—this occurs when there are at least six "yes" or "unsure" votes and no more than one "no" vote. In this case, the borrower is approved to access capital, but the senior pool does not allocate capital to the pool.
3. No approval—this occurs when there is more than one "no" vote, or when there are not enough votes to meet the above thresholds, and in this case the borrower is not approved to access capital.

Goldfinch mimics some of the features of the traditional lending market, in which banks assess the creditworthiness of a given borrower based on their own credit and risk analysis. This is done by "the protocol [through] the concept of 'trust through consensus': that borrowers can show creditworthiness based on the collective assessment of other participants, rather than based on their crypto assets," as co-founder Blake West has explained. The Leverage Model, or protocol, in this way determines how much capital the senior pool allocates towards a given borrower pool, which is in turn based on the trust score developed by the model.

The protocol then uses the collective consensus as a signal for allocating capital. This further, by removing the need for cryptocurrency collateral, and providing a means for passive yield, offers a chance to increase potential borrowers and their access to cryptocurrency, while also providing potential capital providers with greater exposure to borrowers.

Because the Leverage Model relies on counting individual backers, it is necessary to ensure these are represented by different people, and requires all backers, borrowers, and auditors to complete an unique identity check to participate.

The leverage amount, A, that the senior pool allocates is determined by the formula A = S*D*L. In this formula, S is the total capital supplied by backers. While D is the distribution adjustment on a scale of 0 to 1. This is intended to account for how evenly distributed the backers are, with 0 representing a skewed distribution, and 1 representing an equal distribution. This works to ensure no backer is given increased influence. The formula for D is based on the Herfindahl-Hirschman Index:

The leverage ratio is represented by L and is on a scale of 0 to the maximum potential ratio. Based on the number of backers, B, the leverage ratio increases linearly from B_min, the minimum backers necessary for leverage, to B_max, the maximum number of backers for achieving maximum potential leverage:

The Unique Identity (UID) is a non-transferrable NFT representing a Know-Your-Customer (KYC) verification. This follows ERC-1155 standards and does not store personally identifiable data. This is to ensure a person is who they say they are to prevent cases of fraud and other suspicious activity. To receive a UID, a user has to complete a KYC process, which includes personal checks to validate a user's individual identity and to reduce or eliminate duplicate identities. Following this, the user is eligible to receive a UID, which they do by submitting an Ethereum transaction, which mints the UID which is sent to their address.

Goldfinch considers the UID an important part of their platform, as in the company's estimation it can open DeFi to a new set of real-world participants, including companies and financial institutions. And it can expand the design space for new features and mechanisms on DeFi protocols. The UID and its inherent KYC verifications offer companies that otherwise would not work with DeFi financial tools and companies a level of trust, which can increase the comfort level for those companies.

By using an ERC-1155 token, the UID is intended to be interoperable with the rest of DeFi, and this can allow any protocol to benefit from Goldfinch's KYC without needing to build their own KYC flow or handle the data themselves, which Goldfinch offers to other developers to integrate into their platforms and protocols. As well, the UID was build through a partnership between Goldfinch and Persona to manage the process and data, including offering privacy and security to keep trust with users and keep personally identifiable data off-chain.

The GFI Token is Goldfinch's protocol token. It is used for community governance, allowing holders to participate in governance and decide the direction of the protocol. As well, the GFI token is used for participant incentives as explored above. The initial supply of the token is:

Breakdown of the GFI token allocation during the first three years of the company.

During the initial three years, the token is not going to be exposed to inflation; however, after those three years, Goldfinch has suggested they will incorporate modest inflation to reward future active participants, but this will be based on the community guidance.

Flight Academy is an educational program for the community of backers on Goldfinch. The main goal of the program is to provide the community with basic vocabulary and tools to start evaluating debt deals and to further establish norms to help the community develop over time. It is a six-week program comprised of the following modules:

• Module 1, Flight Basics — Introduction to the Goldfinch Protocol and the Backer Role
• Module 2, Flight Training — Due Diligence Part I: Team, Product, and Macro Factors
• Module 3, Flight Training — Due Diligence Part II: Financials and Portfolio Analysis
• Module 4, Flight Training — Deal Structuring: Terms Sheets and Loan Agreements
• Module 5, Test Flight — Completing Your Own Practice Analysis