Goldfinch — How it works
Goldfinch the new DeFi, or Goldfinch is how DeFi supposes to work to bring crypto adoption. Goldfinch is a decentralized protocol that provides crypto loans without collateral.
Why it is important?
Every DeFi protocol at the moment works with over-collateralization. For every $1000 you borrow you have to provide $1200 in another cryptocurrency to get the loan. When your locked cryptocurrency depreciates in value and in the same example $1200 becomes $900 your position is liquidated and you lose your collateral crypto. That also means that if you don't own crypto, you cant borrow money from any DeFi protocol.
How Goldfinch differs?
At moment Goldfinch doesn’t work with end-users. It provides credit lines to different lending organizations. They use this capital to lend money to people in the emerging markets to meet their daily needs. In many countries financial sector is underdeveloped and most of the people are unbanked. That means that they can’t use basic banking services. That is a whole new market with huge potential to grow.
There are 4 types of participants in the protocol.
Borrowers — an organization that wants a loan to finance its operation. It proposes Borrower Pool to the Backers. It must convince backers to provide capital and to fill the junior tranche of the Borrower Pool
Backers — they consider the proposal, research the borrower, and if needed want more detailed information and documents. If the backers accept the pool they start to provide capital and fill the junior tranche of the Borrower Pool. When the tranch is filled, the rest of the capital for the Senior Tranches of the borrower pool is provided by the Senior Pool.
If Backers deem it necessary, they can conclude a contract with the borrowers. Backers are those who provide the first-loss capital for the pool but have higher risk-return. They are incentivized to participate by earning additional rewards. 20% of the interest earned by Liquidity Providers is reallocated to the Backers. Also, the early Backers in the Borrowers pool receive additional rewards.
10% of all interest earned by Backers and Liquidity Providers is retained for protocol reserves.
Liquidity Providers provide capital for the Senior Pool. The Senior Pool automatically allocates capital to approved borrowers pools. Liquidity Providers take fewer risks by not providing capital to specific borrower pools but have fewer returns to their capital. In that way, they earn passive yield. They can withdraw their capital from the Senior Pool at any time if there is enough capital in the pool.
Backers and Senior pool receive NFTs for providing capital to a Borrower pool. The NFTs track how much capital has been supplied, how much is redeemed and how may be redeemed at the moment.
Auditors help to secure the protocol. They check the borrowers if they are legitimate and their business is real. Auditors approve borrowers to borrow from the Borrower Pools. Anyone can be auditor after staking the minimum required GFI tokens.
GFI will be the governance token of Goldfinch. It will be used for votes, staking, rewards for early backers ets.
