Goldfinch Finance: Merging Private Lending with Real World Assets (GFI)

Background and Introduction

Due to the inherent anonymity of blockchain, DeFi lending products find it challenging to grant loans based on individual credit. As a result, most lending products use over-collateralization or credit account methods, either limiting capital efficiency or restricting its usage. Meanwhile, when the capital pool deposited by users is fully utilized, users will experience a higher yield.

Goldfinch cooperates with real-world entities such as institutions, funds, and financial companies with lending needs, bringing off-chain demands on-chain. This greatly mitigates the credit risks posed by borrowers. Users only need to deposit USDC to obtain returns denominated in USDC and GFI. Goldfinch is among the projects introducing real-world debt into the decentralized crypto space under the RWA (Real World Asset) concept.

Team and Investors

Co-founder Mike Sall was formerly the product analytics lead at Coinbase and had previously founded Unbox Research, where he served as a data science director. The other co-founder, Blake West, was a senior backend engineer at Coinbase, boasting over a decade of development experience. As per LinkedIn, Goldfinch has a team of 52 members.

On January 7, 2022, after completing a Series A+ funding round, Goldfinch was restructured to establish the Goldfinch Foundation. The team behind Goldfinch has since divested to Warbler Labs, which has become an independent organization contributing to the Goldfinch community and the broader DeFi ecosystem. Based on LinkedIn data, a significant majority of the 22 members of the Warbler Labs team were originally from Goldfinch.

Investment Details of Goldfinch (Source: RootData)

Goldfinch has undergone three rounds of financing, with each round being participated in by leading VCs in the industry. This has brought significant advantages to its brand, regulatory compliance, and collaborative resources.

Key Roles and Mechanisms

The Goldfinch protocol identifies three principal roles: Investors, Borrowers, and Auditors.

• Investor: Participants who provide USDC to the protocol for use by borrowers. Based on risk levels, they are categorized as:
  • Backers: Independently evaluate borrowing pools, achieving optimized returns. They act as “first-loss capital.”
  • Liquidity Providers: They deposit in the senior pool and then earn basic returns, bearing the risk of “second-loss capital.”
• Borrower: Participants seeking financing. The borrower pool is a smart contract that contains terms sought by the borrower for their loans, such as interest rates and repayment schedules.
• Auditor: The loan approvers. The protocol randomly selects auditors to deliver human-level checks to prevent fraudulent activities. They are rewarded for their work. Becoming an auditor requires staking a sufficient amount of GFI.

According to the documentation and official website, currently, auditor qualifications are not open to application, and audits are conducted by core contributors. As indicated on LinkedIn, the founders, and some executives are the primary auditors.

Within Goldfinch, borrower pools are divided into senior and junior pools. When a borrower makes a repayment to one of their borrower pools, the pool first allocates the payment towards any interest and principal owed to the senior portion at that time, and then towards any interest and principal owed to the junior portion. These two pools correspond to Backers and Liquidity Providers respectively. 20% of the returns from the senior pool are allocated to the junior pool. The specific mechanism can be viewed in the diagram provided (Note: The diagram was mentioned but not shown in the text).

Image: Goldfinch’s mechanism (Source: Whitepaper)

Based on the mechanism design of Goldfinch, the specific loan process is as follows:

1. Borrowers must obtain approval from the decentralized auditors (core contributors) before applying for a loan.
2. Borrowers propose loan terms to Backers. These terms may include details such as the amount sought, loan duration, interest rate, the borrower’s background, and how the funds will be used.
3. After assessing the borrower’s credibility, Backers can choose to provide preliminary funds if they agree with the terms.
4. Advanced pool funds are collected from Liquidity Providers. The advanced pool can lend up to N times the amount of the preliminary portion.
5. Once the advanced pool allocation is complete, the loan process is finalized, and the borrower can access the funds.

Investor Investment Process:

1. To begin, investors need to connect their wallets and then register for a UID. A UID is a non-transferable NFT that represents on-chain KYC verification.
2. Once the UID registration is complete, investors can choose a pool to invest in. For the primary pool, investors should perform their own assessment.
3. Alternatively, they can directly stake in the advanced pool to obtain FIDU tokens, which represent liquidity providers’ deposits into the advanced pool.
4. To withdraw funds early, investors can: ① Wait for maturity. ② Exchange for USDC on the Goldfinch Dapp. The exchange rate is based on the net asset value of the advanced pool, minus a 0.5% withdrawal fee.

Product and User Analysis

Currently, Goldfinch only offers a senior pool pledge product, with an interest rate of around 7.8%. There is no junior pool available at the moment. A total of 24 loans have been issued, with 12 outstanding loans amounting to $101 million. Out of these, 11 loans have been repaid, and one loan has defaulted after its due date.

The borrowers for the product are listed below. Most of them are invested in regions and countries with weak financial infrastructure. These areas might face challenges related to borrowing difficulties or experience significant fluctuations in local currency exchange rates.

• Tugende: A fintech company in East Africa, dedicated to supporting informal entrepreneurs through ownership and lending, addressing the credit gap of small businesses in Africa.
• Almavest: An investment management firm that creatively deploys capital in Asia, Africa, and Latin America to promote sustainable development.
• Cauris: A fintech team whose mission is to foster financial inclusivity by assisting small and medium-sized enterprises in the southern hemisphere. They currently have significant investments in India.
• Greenway via Almavest: A clean stove manufacturer and distributor based in India, committed to assisting low-income consumers in South Asia and sub-Saharan Africa to combat pollution.
• Addem Capital: An innovative private debt fund that offers small business loans in Mexico and Latin America, specifically catering to early-stage companies.

For investors, the annualized rewards for the junior pool range between 2.91% to 13%, with terms ranging from 12 to 49 months. Some products also come with a subsidy of around 2% in GFI.

Tokenomics

GFI is a token located on Ethereum, with a supply cap of 114,285,714 GFI. It’s used for governance voting, auditor staking, auditor voting rewards, supporter staking, early supporter rewards, and other potential rewards for all protocol participants. Below is its initial allocation:

GFI Initial Distribution (Source: Doc)

From the graph, it’s clear that investors and the team claim 50%, with the remaining portion allocated to key roles in ongoing project development being 20.2%. Among these, Backers and Liquidity Providers make up the majority. The project places significant emphasis on encouraging senior pool users. However, auditors, as pivotal token stakers, are only allocated 3.0%, indicating relatively poor staking incentives.

Goldfinch has introduced the Membership feature, where users can deposit GFI and FIDU at a 1:1 equal value to benefit from enhanced senior pool returns. Since it requires equal-value deposits in Vaults, it is susceptible to price fluctuations.

FIDU represents the tokens for liquidity providers depositing into the senior pool. When liquidity providers supply to the senior pool, they receive an equivalent amount of FIDU. Users can stake their FIDU or the LP tokens from providing liquidity to the Curve FIDU-USDC pool on Goldfinch, to earn additional GFI rewards.

FIDU and LP Pledge Page (Source: Official Website)

Competitive Analysis

Based on Goldfinch’s products and primary services, we’ve chosen Centrifuge and Credix, both in the RWA track, for comparison. Below is a key data comparison:

ps: Centrifuge is a decentralized lending protocol based on real-world assets. Credix is a decentralized credit platform that enables borrowers from emerging countries to access previously untapped capital.

Source: RWA.xyz, RootData

Upon comparison, Goldfin has a median loan volume and APY, with a default loan amount of zero. Compared to its competitors, it has more capital support.

Market Outlook

According to data from the International Monetary Fund, the total amount of private debt, loans, and debt securities accounts for 159.1% of global GDP. The scale of the private debt market is vast, with even a small fraction surpassing the total market value of cryptocurrencies.

Goldfinch, a decentralized protocol backed by various capitals, bridges off-chain debt to on-chain, allowing holders to earn consistent returns while enabling borrowers to access capital. It also introduces tools such as FIDU-USDC LP to address liquidity risks, showcasing its innovative nature.

Currently, Goldfinch ranks third in the industry in terms of total loan amounts in the RWA sector. While it’s still far from the leading position, the approval of “moSecured U.S. Fintech Yield via Stratos” in 2022 is good news for Goldfinch. This means that borrowers are not limited to developing countries like Asia and Africa. The more diversified the borrowers, the more it helps attract a diversified user base.

Secured U.S. Fintech Yield via Stratos (Source: RWA.xyz)

Risks

Default Risk

The risk arising from the borrower’s inability to repay on time.

Process Risk

Potential procedural errors or mishandling that might occur during the Backer audit process, as well as during the auditor’s review.

Security Risk

Since the lending pool is created by smart contracts, there theoretically exists a risk associated with contract security.

Fraud Risks

As indicated in the document, borrowers must pledge a certain amount of GFI as a reward for auditors. This could lead to a situation where auditors take risks to earn high GFI rewards due to insufficient protocol incentives.

“Once a borrower’s initial borrower pool reaches at least 20% of its limit, and they have pledged enough GFI to reward the auditor votes, the borrower can request approval voting. If more than 2 auditors vote against it, the borrower’s entire pledged GFI amount will be deducted.”

There’s also a potential risk: borrowers acting as Backers might deposit up to the 20% limit and then defraud funds from the senior pool. Even though there are UID restrictions in place, fake Backers could still emerge. Currently, as auditors are core contributors to the project and hence have vested interests, this risk is not prevalent. However, it still warrants attention.

Other Risks

Risks arising from USDC regulations and collaborators such as Curve.

How to Own GFI?

You can obtain GFI through centralized cryptocurrency exchanges. Taking Gate.io as an example, you first need to create an account and complete KYC verification. After depositing funds into the account, you can follow the guidance to purchase GFI on the spot or derivatives market.

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Check the latest price of GFI and choose your preferred trading pair to transact.

Conclusion

Goldfinch’s innovative mechanism effectively addresses lending needs in the real world. Faced with the global private debt market, Goldfinch is temporarily unable to meet larger demands due to investor restrictions, such as the requirement to deposit USDC and undergo KYC. However, with the continuous development of the RWA industry and the refinement of crypto regulations, there’s a significant likelihood of a breakthrough in market size. This may be a long-term outcome that necessitates collaborative efforts. Yet, with the support of leading VCs like Coinbase and a16z, Goldfinch possesses a greater chance of becoming a frontrunner in the RWA domain. Of course, as a DeFi product, it still carries various risks, and investors should carefully consider these before investing.