Goldfinch Protocol Explained: A Beginner's Guide to Decentralized Lending and Borrowing

The blockchain industry has been focusing on developing Web 3.0 for several years now. This has led to the development of the metaverse, interoperability, decentralized finance (DeFi), and other products. So far, DeFi likely did the most to help the crypto industry reach greater financial inclusion than traditional finance. It provides benefits such as passive income and the ability to take out loans to everyone worldwide. It vastly simplifies the lending process and opens up new opportunities for the unbanked.

One problem with lending, however, is that most projects require you to overcollateralize your loan. So far, this has been deemed necessary to secure the lender. Basically, if you don’t return the money, your collateral gets taken away. However, this also acted as a major barrier for many who needed the loans but couldn’t afford them. A project called Goldfinch Protocol took notice of this issue and came up with a solution.

What Is Goldfinch?

Goldfinch Protocol, or just Goldfinch, is a crypto lending platform. The project has developed a decentralized lending protocol that makes it easier for organizations to accept crypto loans. So far, in order to get a loan, it was necessary to already possess large quantities of cryptocurrency. This crypto would then serve as your collateral, and you would typically have to overcollateralize the loan.

This is quite risky for potential borrowers. If you need to borrow money, it is reasonable to assume that you do not have that money. However, in order to offer security to lenders, the crypto lending protocol requires you to deposit it as collateral. So, even if you managed to obtain it, you are then expected to risk it by turning it into crypto. Apart from stablecoins, cryptocurrencies are extremely volatile, and that means that your coins could get devalued very quickly. 

To make DeFi lending and borrowing more inclusive, Goldfinch came up with a new approach. Basically, it is the first lending protocol that lets you use off-chain collateral. You still have to provide collateral and overcollateralize your loan. However, you are no longer obligated to do it with cryptocurrency, which is a massive game-changer for potential borrowers. Many say that this is the missing piece that will make DeFi lending possible for most people in the world.

The project was started by a group of professional developers who gathered around one idea. The idea is to move the world’s financial system forward by solving its most challenging problems. Goldfinch Protocol is extremely ambitious, and it is well aware of that. They believe that all private debt will move onchain. While they themselves realize how outlandish this sounds, they still expect that this is coming.

At that point, it will seem silly for companies to loan from banks rather than crypto protocols. Their manifesto states that “Going to a bank will be like bartering your goods with your neighbors instead of using the internet to sell them online.” Of course, the project is well aware that this is all far in the future. But they decided that they had to start somewhere, and they accepted this vision of the future as fact. Now, all they need to do is help make it come to life.

How Does Goldfinch Work?

The way the protocol works is fairly simple in concept. The project targets businesses from emerging markets as its borrowers, while anyone can become a lender. Borrowers get to propose the terms of the deal for the borrower pool to the protocol. Then, the project’s community of investors decides whether the terms are satisfactory.

The community can opt to provide funding by using two methods. One is to offer them directly to the borrower pool as backers. The other method is a bit indirect. It involves the automatic allocation of capital across the protocol. In this case, community members would act as liquidity providers, using the Senior pool.

Borrowers would then use their credit lines (borrower pools) to withdraw crypto assets — stablecoins — specifically, USDC. After that, they can simply exchange the stablecoin for fiat. From there, they can use the funds in any way they wish in the real world.

What Makes Goldfinch Unique?

Goldfinch has a lot going for it and is original in many ways. However, the most important aspect of the credit protocol is the fact that it doesn’t require crypto collateral. This is the first example of a credit protocol that offers such a deal, especially in emerging markets. Instead, they can use assets in the real world as collateral, thus creating a bridge between reality and decentralized finance.

This increases financial inclusion and makes crypto assets loans more accessible. At the same time, the project can provide above-market returns to capital investors.

Of course, with the project targeting real businesses worldwide, it also has a specific way of selecting them. It incorporates the principle of trust through consensus. This means that borrowers can prove creditworthiness based on the collective assessment of community members. Other protocols do not use this system — they simply approve loans to anyone who can overcollateralize their loan.

What Are the Benefits of Goldfinch?

Goldfinch’s way of doing things substantially expands the potential borrowers and potential lenders, as well. As such, it allows a greater number of people to gain exposure to decentralized finance. At the same time, it allows lenders and borrowers to diversify outside of crypto and gain exposure to real-world assets.

Another benefit is that this method discourages fraudulent backers. Each backer needs to be verified, which is the first guard against any kind of fraudulent attempt. The second guard lies in the fact that backers must take a real risk by supplying first-loss capital. Essentially, the backers only achieve returns if the borrowers do return the money. 

And, of course, fraudulent borrowers are also discouraged from taking advantage of honest backers. The first guard, in this case, is the auditors, who need to approve borrowers before borrowing takes place. The auditors are selected completely at random. That way, it is not possible to make a deal with them to ensure the success of the fraud.

The second guard is the backers themselves. Since they are the ones providing the money, they are encouraged to analyze their investments closely. They are even allowed to sign legal off-chain contracts with borrowers.

Goldfinch (GFI)

Being a crypto project, Goldfinch Protocol also has its own token. Two, in fact. One of them is its main cryptocurrency, known as GFI. The other is FIDU. Both are ERC-20 tokens, and apart from them, the project also uses USDC stablecoin.

GFI is the main native cryptocurrency of Goldfinch, and it serves primarily as a token for governance voting. It also plays a role in auditor staking, voting rewards, community grants, protocol incentives, and more.

As for FIDU, it is a token that represents a Liquidity Provider’s deposit made to the Senior pool. Basically, whenever you deposit funds to the Senior Pool, you get FIDU in return. The token can later be redeemed for USDC using the Goldfinch dApp.

As for USDC, it is not the project’s native crypto, but it is used for investments and loans. As a stablecoin, it is the most preferred option since it is unlikely to be devalued due to volatility.

Is Goldfinch Protocol the Future of Lending?

Goldfinch Protocol is quite unique as credit protocols go. From the fact that it targets businesses to the way it operates, everything about it is different from other projects. It is the first project that actually goes out of its way to enable better access to DeFi. This is something that is extremely appreciated by businesses in unbanked regions. 

Does this require different safety measures? Of course. But is it worth it? Definitely. As long as everyone plays by the rules and does their part, this credit protocol can be very rewarding.

FAQs

What Is Goldfinch Protocol?

Goldfinch Protocol is a lending project with a unique approach to loans. What differentiates it from others is that it doesn’t require crypto collateral. Instead, it allows its target borrowers to use real-world collateral.

Who Owns the Goldfinch Protocol?

Goldfinch protocol is decentralized. As such, it is owned by the community. However, it does have a team of developers who work on it.

How Does Goldfinch Work?

Goldfinch targets businesses in developing economies, allowing them to submit loan requests with their own terms. It then has its community assess the borrower, the terms, and other aspects and decide whether to accept. If they do, they can provide the funds in two different ways.

Does Goldfinch Have a Token?

Goldfinch has two native tokens — GFI and FIDU. GFI has several use cases, such as governance voting and more. FIDU, on the other hand, serves as proof of deposit to the project’s senior pool.