While the benefits of using a decentralized lending network are available today, friction in the user experience and a steep learning curve limit usage to early adopters. These protocols also require overcollateralization with crypto, preventing the vast majority of potential borrowers from participating. There is an opportunity to build a product that addresses these obstacles in order to bring more users into the crypto economy. This drove our investment in Goldfinch.
Founded by a team of ex-Coinbase engineers and product leaders, Goldfinch is a decentralized protocol that allows for crypto borrowing without crypto collateral. They’re starting where the pain is greatest — emerging markets. Goldfinch has partnered with financial institutions across emerging markets including Mexico, India, and Nigeria. These financial institutions propose terms to borrow from the Goldfinch protocol. If approved, these funds can be lent to customers locally. The financial institutions can follow their own established processes for loan origination and servicing, abstracting crypto complexity from end users, and handling bulk repayment back to Goldfinch.
This partnership enables Goldfinch to bring off-chain lending activity on-chain, while providing much needed access to capital for lenders and their customers. Unlike the borrower experience on most decentralized lending networks like Aave or Compound, neither the financial institutions nor their customers are required to put up crypto collateral. Instead, the Goldfinch protocol is based on “trust through consensus,” which enables borrowers to show creditworthiness based on the collective assessment of network participants rather than based on their crypto assets.
Today, the core team is underwriting borrowers. Over time, underwriting and approvals will be done by a distributed network of incentivized participants. ‘Backers’ evaluate potential borrowers and supply first-loss capital to the borrowers that they approve. Their returns are levered by senior tranche capital supplied by ‘liquidity providers,’ or investors looking to earn passive yield. In return for their work and risk taken, backers are compensated with 20% of the liquidity providers’ nominal interest on loans they approve. Liquidity providers provide less risky capital and get diversification across loans on the network. ‘Auditors’ perform human-level checks on borrowers to confirm they are legitimate, and earn rewards in return.
This elegant solution broadens the scope of potential borrowers that can participate in the protocol. Borrowers no longer need to hold a substantial amount of crypto that they can use as collateral for a loan. Instead, borrowers are incentivized to pay on time because their on-chain history will be publicly available to future creditors, even those off-chain.
Additionally, given the focus on smaller financial institutions in emerging markets, Goldfinch will be able to quickly scale loans and repayments through the network. They will also have a diversified lending pool, which can attract more traditional institutional investors, who are looking for yield at risk levels they can underwrite.
Unlike most DeFi applications, Goldfinch is built with this user — lending partners in emerging markets — in mind. By focusing on this user and use case, Goldfinch is using language that is familiar and building an interface meant for a non-crypto native user. There will always be a need to abstract the complexity of decentralized applications for less technical users. This will also position Goldfinch well to expand to institutional investors over time.
And lastly, by targeting global traditional financial institutions, yields on Goldfinch will potentially be uncorrelated with the broader crypto market. If DeFi yields fall during a bear market, capital may flow into Goldfinch, but during a bull market, capital will flow into all DeFi protocols. It’s a win-win!
Having said all that, Goldfinch is not without risks. Bridging traditional financial institutions with DeFi on a global scale is regulatorily complex. The Backer/Auditor roles will be crucial to get right. Well functioning payment rails are required for these institutions to move in and out of stablecoins to borrow and repay loans. However, we think these are surmountable challenges.
We are excited to support Mike, Blake, and the rest of the Goldfinch team on this journey as we work to onboard the next billion users into the crypto economy!