Decentralized lending has over $36B in total value locked (TVL), up over 300% from the beginning of “DeFi Summer” less than two years ago. A number of lending protocols have generated billions of dollars of value for their holders, including MakerDAO, Aave, Compound, and Liquity, just to name a few.
Source: DeFi Pulse
However, the users of today’s decentralized lending protocols face two major limitations. First, most loans are over-collateralized. In other words, most protocols require a user to deposit more funds—where the precise value is determined by the collateralization ratio—than they receive. This makes lending a fairly capital-inefficient process, typically used by DeFi traders looking for leverage. Secondly, the only form of collateral accepted for most lending is crypto itself; not real-world assets, fiat, or illiquid NFTs.
Source: Rennick Palley
On the other side, lending protocols’ liquidity providers have increasingly become dissatisfied with the rate of return on their funds. As more capital has surged into the DeFi ecosystem, the once-juicy annual percentage yields (APYs) for lending have found a lower equilibrium. As a result, “mercenary” liquidity providers—ruthless asset allocators looking for the most favorable risk-return ratio—have found other sources to park their idle capital. Some even predict that the APYs of lending protocols will asymptotically approach that of their TradFi counterparts as more capital rushes in.
While today’s lending protocols have been successful in providing capital to people and institutions willing to over-collateralize their loans with crypto-assets, this is an extremely niche category. In order to reach the rest of the world, a new decentralized lending model is needed.
Goldfinch is a decentralized credit protocol that provides loans without requiring crypto collateral.
In particular, Goldfinch is focused on providing wholesale capital to fintech lenders in developing countries with less access to capital. To date, the highest volume of crypto loans on Goldfinch has gone to borrowers in Kenya, Nigeria, Uganda, and the Philippines. These are facilitated through lending partners such as Payjoy (smartphone financing in Mexico), Aspire (business financing in Southeast Asia), and Quickcheck (consumer loans in Nigeria).
To understand how Goldfinch enables real-world lending, just see this recent loan from the protocol:
“On November 30th 2021, the Goldfinch platform funded a $10 million dollar loan to borrowers based in South America, India and Africa, with no interaction from a single decision maker — the loan was sourced, underwritten, and funded in a completely decentralized way. 141 members of the Goldfinch community, known as “Backers”, funded $2.5 million in a junior tranche, and the “senior pool” algorithmically funded the remaining $7.5 million. There were over 30 countries of residence for the 141 backers — a truly global transaction, facilitated seamlessly.”
By structuring loans in this unique way, Goldfinch bridges the “crypto-world” with the “real-world,” adding value to both market participants.
On the borrower side, loans no longer need to be over-collateralized with crypto-assets. Instead, Goldfinch uses the collective assessment of the protocol’s participants; this could involve real-world collateral, credit scores, or other forms of creditworthiness. This makes capital drastically more accessible for non-crypto-native people and businesses.
And, on the lender side, these real-world lending opportunities typically have higher APYs than other opportunities with similar risk profiles, sometimes on the order of over 20%.
Powering scalable real-world lending.
So how does Goldfinch do it?
The magic lies in the way that the protocol sources and funds lending opportunities.
“This system is the first of its kind in DeFi, a hybrid decentralized governance system that has both a discrete decision-making function for each loan (the underwriting process for Backers) and an automated governance-free decision-making process for deploying senior pool funds. These combine to create a system that is highly scalable in that it doesn’t require the entire community to agree on making an individual loan, and is also effective at making intelligent discrete lending decisions quickly for borrowers anywhere in the world — in other words, Goldfinch is the first Web3 protocol to bring human judgment on-chain at scale.”
From beginning to end, here’s (roughly) how a loan on Goldfinch is granted:
Borrower creates a Borrower Pool, which acts as a “term sheet” and defines the interest rate, limit, payment period, term, and other loan details.
Auditors, a group of randomly-selected vetting agents who stake the protocol’s GFI token, confirm that Borrowers are legitimate, typically through off-chain means.
Backers, a group of private investors, assess and then supply capital to the Junior Tranche of the Borrower Pool. Since they take on more risk and do the work of evaluation, they earn significantly higher returns.
The Senior Pool (funded by Liquidity Providers) provides capital to the Senior Tranche to complete a Borrower Pool. The amount of funding provided by the Senior Pool is determined by the Leverage Model, which acts as an index of creditworthiness. 20% of Senior Pool interest is reallocated to Backers.
The loan is funded and transferred to the Borrower through the Borrower Pool.
Here’s an example of the terms on a sample loan:
“Consider a Borrower Pool with a 15% interest rate and 4.0X leverage ratio. If the Backers supply $200K, the Senior Pool will allocate another $800K. Assuming the Borrower borrows the full $1M for one year, they will pay $1M * 15% = $150K in interest. Of that, the Senior Pool receives 0.15*(1 - 0.1 - 0.2) = 10.5% interest, or $800K * 0.105 = $84K. The Backers receive 0.15*(1 - 0.1 + 4*0.2) = 25.5% interest, or $200K * 0.255 = $51K. The remaining $15K is the 10% protocol reserve allocation.”
Since Backers of the Junior Pool take on more risk—as they’re the first to be liquidated—they receive a higher interest rate since they are the first capital to be liquidated in the event of a default.
Goldfinch’s Senior Pool, in just a few months, has already accumulated over $80M. These incentivization mechanics fuel the funding and evaluation of new lending opportunities, allowing the model to continue to scale.
The $GFI token.
$GFI is being distributed to early Liquidity Providers of the Senior Pool; if you’re eligible, see how many $GFI tokens you’ve earned here.
The $GFI token has a number of purposes:
Governance: $GFI is used to vote for the future of the protocol, using a quadratic voting mechanism.
Backer and Auditing Staking, which increases the power of Backers and Auditors by staking $GFI with them.
Community Incentives, including incentives for Liquidity Providers and community grants.
Goldfinch has had a montumental 2021: they’ve already granted $38.6M in active loans and reached over 232K borrowers. In the past few months, they’ve launched the lending mechanics, grown over 154x, and closed a $25M round of fundraising.
The impact Goldfinch has already made in connecting crypto capital with businesses and individuals around the world has been remarkable to watch. I’m looking forward to seeing another big year from the Goldfinch community in 2022.
- Paul Veradittakit
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Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. I’ve been in the industry since 2014, and the firm invests in equity, early stage token projects, and liquid cryptocurrencies on exchanges. I focus on early-stage investments and share my thoughts on what’s going on in the industry in this weekly newsletter.