Goldfinch (GFI): Crypto Loans for the Real World

The Uniqueness of Goldfinch Crypto Loans

In order to understand what sets Goldfinch apart from other crypto loan protocols, it’s worth examining the crypto loan ecosystem in its entirety. Due to the anonymous nature of the blockchain, which makes collections and assessment nearly impossible, most crypto loans are overcollateralized with on-chain assets, meaning that you must have more crypto collateral than the loan amount you’re taking out. For example, if you’d like to take out a USD 5,000 loan from a crypto lending protocol, you may need to deposit USD 10,000 (or more) worth of crypto collateral in the form of bitcoin (BTC) or another approved cryptocurrency.

While there are benefits to overcollateralized loans (such as fast approvals without credit checks), they represent only a tiny sliver of traditional lending activity, and they leave out a substantial portion of the population — those who don’t have more in on-chain collateral than they want to borrow. This is particularly true in developing regions, which is where Goldfinch has initially focused its efforts. The underlying idea of Goldfinch is to not limit crypto loans to liquid on-chain collateral, but instead to build a human coordination protocol to assess risks and allocate capital, thus allowing for the entire spectrum of lending to happen on chain, in a decentralized manner.

Goldfinch crypto loans are optimized to approve applicants with high chances of loan repayment, while also incentivizing the lending of capital through better-than-average annual percentage yield (APY) returns. The project launched in December 2021, and by February 2022, thousands of Goldfinch crypto loans had already been distributed in Nigeria, Mexico, and Southeast Asia.

In addition to enabling loans that are collateralized by off-chain assets, income, and reputation (vs. on-chain assets), Goldfinch also sets itself apart by lending to real world businesses that are uncorrelated with the rest of the crypto markets. Most other credit protocols lend to crypto trading firms or market makers, whose activity is highly reflexive and correlated with the crypto markets themselves.

GFI Token: Goldfinch Crypto Governance and Rewards

Powering this crypto credit ecosystem is the Goldfinch token (GFI). The GFI token is used for governance, allowing GFI crypto holders to vote on protocol changes through a community-governed decentralized autonomous organization (DAO). It is also used for staking, auditing, and to incentivize platform users in the form of GFI crypto rewards.

The Goldfinch Crypto Protocols’ Parties

The Goldfinch crypto protocol has four key parties: Auditors, Backers, Liquidity Providers (LPs), and Borrowers. These parties are incentivized to behave ethically via GFI crypto rewards and confiscations. These loans are referred to as Borrower Pools, which are smart contracts that encode a Borrower’s loan terms. They set interest rates, late penalties, and repayment schedules. Goldfinch then extends crypto credit lines to Borrowers, who in turn withdraw stablecoins which they exchange for fiat currency before deploying the capital in local markets.

Any potential Auditor must stake GFI tokens and pass a verification that Goldfinch calls a “Unique Entity Check.” In exchange for doing this, these GFI stakers are randomly assigned to assess whether a borrower is who they claim to be. In exchange for honestly doing so, they receive a GFI crypto payment.

Goldfinch Backers evaluate Borrower Pools and then decide whether they want to provide capital. These Backers are incentivized with a higher APY than LPs for evaluating applicants and providing capital. However, Backers are taking on more risk than LPs as they are providing first-loss capital, meaning their capital is the first to go should the loan default.

Goldfinch Liquidity Providers provide capital to what the protocol calls the Senior Pool. The Senior Pool distributes capital to Borrower Pools based on the number of pool Backers. This lent capital is lower risk, as the first crypto liquidated comes from Backers. For this reason, 20% of the Senior Pool’s nominal interest is redirected to the Backers, which rewards them with a higher interest rate for taking on additional risk.

The last party is the Borrower. The Borrower must pay GFI tokens to access the protocol. This is done to pay the Auditor, show Backers the Borrower is serious, and prevent spamming and bots. The remaining GFI is returned to the Borrower after loan repayment.

Goldfinch and Trust Through Consensus

Goldfinch allows nearly anyone to be a lender or underwriter (Backer) through its innovative design. In addition, while not necessary, Backers can form off-chain collateral agreements with Borrowers to further mitigate risk and assess creditworthiness. While Goldfinch is an innovator with a proven use case, there are already numerous Goldfinch competitors looking to get into the burgeoning real world asset crypto loan market. However, using the aforementioned mechanisms, and the protocol’s principle of “trust through consensus,” the Goldfinch crypto loan book exploded a hundredfold from Feb 2021 to April 2022 (going from USD 1 million to 100 million).