The Future of Decentralized Credit: Goldfinch Protocol
Over-collateralization (OC) is the provision of collateral that is worth more than enough to cover potential losses in cases of default. Why is this a bad thing? In traditional financial OC is usually implemented as a way to reduce risk to the lender and a borrower may use OC in order to get better terms for a loan. In the case of cryptocurrency, DeFi projects like Aave and Compound may use OC to reduce risk to the potential investor. On the surface this may seem like a great practice, but it implies a troubling reality that lurks beneath the surface: The tokens used to generate yield could collapse in value. Volatility, hacks and project failures are all common occurrences in crypto. In reality, most crypto projects have no revenue or assets backing up the value of their tokens.
Many participants of the recent DiFi yield farming trend were attracted to lending deals that generated yields that seemed too good to be true… and most of them were. What they didn’t understand was the concept of principal risk. Principal risk is the risk of losing the full value involved in a transaction, typically as a result of the default or insolvency of the counterparty.
When the crypto markets were hot, every project seemed invincible. Once this craze wore off investors quickly learned that the tokens they were staking to generate yield quickly contracted. It became a race to the doors to withdraw capital from these protocols. Not only did their principal investment collapse in value, but the forecasted yield they were expecting vanished along with it.
Goldfinch enables lenders to take advantage of the yields crypto has to offer, without being over-exposed to DeFi’s risk of a collapse in principal when on-chain volatility hits because Goldfinch’s USDC returns are generated by Borrowers operating with real-world assets and revenue. All Goldfinch loans are over-collateralized by off-chain assets, and are tied to real-world legal structures.
DeFi credit protocols like Aave and Compound have seen a huge amount of success over the years but serve a very narrow use case. Users of these credit protocols primarily use them for margin trading or using it to take profits on their gains of highly appreciated assets while still maintaining some exposure to the upside of the asset. These DeFi lending protocols contain billions of dollars of over-collateralized tokens with a high volatility profile. Over-collateralization may decrease some of these potential risks, but it doesn’t solve the underlying problems and risks associated with the projects.
Goldfinch pools aren’t tied to the performance of the wider crypto/DeFi markets. The performance and volatility of ETH, BTC, Luna, etc. have zero impact on Goldfinch Borrowers’ ability to honor their repayment obligations. This is unlike traditional DeFi lending, where the risk of loss is directly tied to crypto asset values.
Goldfinch’s stablecoin rates, protocol revenue, and borrowing volume are holding steady while many protocols are experiencing a decline in core yield metrics. This shows the long-term stability of bringing real-world investment to crypto, as the rates Goldfinch borrowers pay arent tied to on-chain volatility. Goldfinch’s decentralized credit protocol is successfully sheltered from DeFi’s volatility.
Goldfinch’s primary market is to credit funds and fintech companies in several emerging markets. All Goldfinch loans are over-collateralized by off-chain assets from the businesses they serve, and are tied to real-world legal structures. They are successfully bridging the the gap between stable coin capital and real world commerce. These businesses have income and assets which makes defaulting on the loans less of a risk than what traditional DeFi protocols do. Goldfinch’s protocol acts as a bridge between the decentralized, trustless world of crypto to the real world of business activity.
They are reaching out to companies who have been under-served in the traditional financial system. There’s not enough capital going into these markets despite the fact that there’s a lot of great businesses that exist in these markets with years of track record of lending out money, while being able to generate sizable returns.
For context, Goldfinch surpassed the $100 million market in active loans distributed across both developed and emerging markets on April 26, 2022. The benchmark represents a 100X increase in active loans from just a year prior for the 16-month-old protocol. Goldfinch’s loans are spread across 28 countries, including the U.S., Brazil, India, Indonesia, Mexico, and Nigeria.
Goldfinch currently has a 21 million dollar market cap and trades on Coinbase under the symbol $GFI. It is backed by some of the biggest crypto VCs in the industry including:
Andreessen Horowitz
Coinbase Ventures
Variant
Kindred Ventures
Ideo Colab
SV Angel
Mercury Corp Ventures
a_capital
Access Ventures
Stratos Technologies
For more information, you can view their website here: https://goldfinch.finance