Goldfinch - Real World Assets Protocol
In these days of Real World Assets (RWA), I'm going to review Goldfinch, a project I've been following closely, which aims to revolutionize DeFi by making real world assets accessible to everyone.
Let's start if you are ready:
Overview
Goldfinch Protocol, with its Borrowers, Backers, Liquidity Providers, and Auditors, is a pioneering force in the DeFi realm, particularly focused on Real-World Assets (RWA). Borrowers propose loan terms, Backers assess and supply capital, while Liquidity Providers contribute to the Senior Pool for passive yields.
The Senior Pool uses a model to allocate capital, benefiting Backers who also assess Borrower Pools. Auditors ensure trust by approving Borrowers, adding a critical layer of security to the integration of RWAs in DeFi. This ecosystem reshapes decentralized credit access while bridging the gap between the traditional financial world and the blockchain universe.
Team and Management
Mike Sall has worked at Coinbase, Medium and Adobe and is currently a co-founder of Goldfinch. Another co-founder is Blake West, a former and successful Coinbase engineer. @goldfinch_fi Governance is managed by a community DAO and has the ability to perform maintenance functions and parameter adjustments through decentralized governance votes:
- Upgrade contracts
- Changing protocol configurations and parameters
- Choose unique Asset Control providers
- Set up GFI rewards and distribution
- Pause protocol activity in an emergency
Security and Mechanics
Security
The protocol is designed to resist fraud even though crypto does not require overcollateralization. It addresses several potential fraud scenarios:
▪️ Fraudulent Borrower, Honest Supporters: Supervisors randomly approve borrowers, making collusion difficult. Supporters are encouraged to investigate debtors and legal contracts offer recourse.
▪️ Borrower Collusion with Promoters: Random auditor selection, verification of promoters, and Unique Asset Control prevent collusion. Collusion must convince many verified backers.
▪️ Borrower Collusion with Auditors: Unique Asset Control prevents fraudulent auditors, GFI with shares encourages honest auditing, random auditor selection is weighted by shares, explicit requests for approval prevent collusion, and many backers must be convinced.
▪️ Fraudulent Backers, Honest Borrowers: Verification of backers and a real risk requirement deter fraudulent backers. They only benefit if borrowers repay.
Mechanics
The protocol described involves several key participants: Borrowers, Promoters, Supervisors, Liquidity Providers and Governance. Here is a summary of their roles and incentives:
Borrowers
▪️ Request financing from the protocol by creating Borrower Pools with defined terms.
▪️ Terms include interest rate, borrowing limit, repayment period, maturity period and late fees.
▪️ Must pledge GFI as collateral for approval and can borrow capital depending on the supply of Supporters.
▪️ Incentives for repayment include continued access to borrowing, publicly available on-chain history and potential off-chain legal settlements.
Backers
▪️ Evaluates Borrower Pools and provides first loss capital to lower tranches.
▪️ Can earn higher returns through Senior Pool leverage and early Supporter rewards.
▪️ Can stake GFI on other Backers for leverage, earning rewards based on leveraged GFI's interest.
Auditors
▪️ Perform checks on Borrowers to confirm borrowing legitimacy.
▪️ Auditors deposit money with GFI for approval votes and earn rewards for majority vote approvals.
▪️ Approval votes determine Borrower eligibility and penalties are applied for wrong votes.
Liquidity Providers
▪️ Provides capital to the Senior Pool to generate passive returns.
▪️ The Senior Pool allocates capital to senior tranches of Borrower Pools based on the Leverage Model.
▪️ Receive FIDU tokens redeemable for USDC in exchange for supplying the Senior Pool.
Governance
▪️ Managed by a community DAO.
▪️ Votes on protocol upgrades, configuration changes, Unique Entity Check providers, GFI rewards and emergency protocol pauses.
Leverage Model
▪️ Determines the allocation of the Senior Pool to the Borrower Pools based on the supply of Supporters and trust by consensus.
▪️ Trust is established by counting individual Supporters.
▪️ A formula calculates the amount of leverage based on total Backer capital, distribution adjustment and leverage ratio.
Unique Asset Control
▪️ Ensures participants are unique entities to prevent cybersquatting attacks.
▪️ Validated by approved providers, starting with oracles.
▪️ Governance can choose to move to on-chain decentralized identities when available.
Unique Identity (UID)
Unique Identity (UID) is a non-transferable NFT that verifies KYC, KYB and US Investor Accreditation on-chain. It follows ERC-1155 standards and allows real-world participants, including companies, to participate in DeFi while ensuring privacy. UID issuance involves verification by partners such as Persona and Parallel Markets. It is offered in five types, each with specific permissions:
▫️ Non-US Individual: Can vote and provide capital across the protocol.
▫️ US Accredited Individual: Can vote and provide capital to the Senior Pool and select Borrower Pools.
▫️ US Non-Accredited Individual: Can vote but cannot provide capital.
▫️ US Accredited Entity: Can vote and provide capital to the Senior Pool and select Borrower Pools.
▫️ Non-US Entity: Can vote and provide capital across the Protocol.
UID increases DeFi adoption, protects privacy, and can be adopted by other protocols.
Goldfinch Senior Pool
The Goldfinch Senior Pool is the only pool currently open, with approximately $78 million in assets in the pool. The Senior Pool provides Liquidity Providers (LPs) with access to Goldfinch. LPs contributing capital to the Senior Pool seek passive, diversified exposure in any Borrower Pool that benefits from Senior Pool capital.
Senior Pool is designed to provide security through features such as first loss capital protection with 20-25% coverage on all deals except one legacy investment. It is also over-collateralized with real-world off-chain assets. In addition, continuous monitoring is provided through monthly reporting and direct borrower communication.
Conclusion
Pros
▪️ Real World Asset Integration: The Goldfinch Protocol is at the forefront of DeFi's evolution with a focus on Real World Assets (RWAs). This innovative approach expands financial access by bringing real-world lending and borrowing opportunities to the blockchain.
▪️ Community Governance: The protocol operates under a community DAO that enables decentralized governance. Users are empowered to vote on important protocol decisions, ensuring a democratic and adaptive ecosystem.
▪️ Security Measures: Goldfinch has robust security measures in place to prevent fraudulent activity and foster trust among participants. This includes auditors, unique asset controls, and legal contracts.
▪️ Privacy-Focused UID: Using NFTs and third-party verification, the Unique ID (UID) system enables KYC, KYB and US Investor Accreditation checks without compromising privacy. Five types of UID meet different user needs.
▪️ Global Access: Goldfinch is actively expanding access to financial services in emerging markets, benefiting borrowers in 28 countries. Partnerships and collaborations with reputable organizations strengthen its position.
▪️ Trade Availability: $GFI tokens are traded on reputable exchanges, providing liquidity and accessibility to users.
Cons
▪️ Inflation Discussion: There may be various fluctuations in token value due to inflation. There are some suggestions in the governance forum. Let's see what happens.
▪️ Regulatory Considerations: Goldfinch's focus on real-world assets and authentication via UID could lead to regulatory scrutiny in various jurisdictions. Participants should familiarize themselves with evolving regulatory requirements that may impact the protocol's operations.
In summary, Golfinch's innovative approach to integrating Real World Assets (RWAs), coupled with its community-driven governance, strong security measures and privacy-centric features, positions it as a promising project in the DeFi landscape. Users interested in engaging with Goldfinch should thoroughly explore the ecosystem and familiarize themselves with governance decisions to maximize the benefits of participation.
