Goldfinch Protocol: Crypto Loans Without Collateral
In the DeFi space, there is a huge opportunity to change access to debt capital, but this will be possible when it becomes possible to issue loans without collateral. This will open up crypto lending to many people around the world.
Now in the DeFi lending market, the volume of blocked funds is over $ 20 billion. For comparison, a year ago there were $ 200 million. However, even this growth does not fully reveal the potential of DeFi.
The main reason is that lending in the cryptosphere is overly collateralised. For every $ 1 that is borrowed, an average of $ 1.5 must be deposited in another asset that the borrower already owns.
This collateral requirement holds the system back. Such loans are suitable for a small number of borrowers - mainly for margin traders, and those who do not want to sell their crypto assets to play on the market.
But for most people in the world, the main reason for taking out a loan is the lack of money that is needed. Therefore, getting rid of the collateral requirement is the key for crypto assets to break out into the global debt market.
Goldfinch Protocol is a protocol that fills one of the biggest gaps in DeFi - no collateral lending.
How does the protocol work?
The protocol expands lines of credit for organizations that are engaged in microcredit. At its center is the USDC liquidity pool from which lending companies can receive funds. The US dollar is then exchanged for local currency and lent to end borrowers in the local market.
Thus, the protocol connects the global cryptocurrency market and local local loan markets, providing qualified lending companies with access to additional capital and growth in the number of clients.
Borrowers are able to obtain low-cost loans. Investors, owners of cryptocurrencies, can invest in the pool and earn income in the amount of 10-14% per annum. As soon as the lending institution pays interest on the minutes, the profits are immediately distributed to investors.
Start: Emerging Markets
The founders of Goldfinch are former employees of the crypto exchange Coinbase – Michael Sall and Blake West. Investors include Kindred Ventures, Coinbase Ventures, IDEO CoLab Ventures and Dragonfly Capital co-founder Alex Pak.
From the outset, Goldfinch's vision has been directed towards the most interested borrowers who will benefit the most, and where cryptoassets can make the most impact. Therefore, emerging markets were selected. In developing countries, the greatest demand is due to the inefficiency of traditional financial institutions, which limit the flow of capital to these markets and access to them for more borrowers. They are also countries where crypto assets are really popular.
First, Goldfinch acts as an underwriter - checks and evaluates credit companies, and then determines the possible terms of cooperation and allocates funds.
The protocol was launched in December 2020 with partnerships with reputable credit companies: PayJoy in Mexico, QuickCheck in Nigeria. They have a lot of successful experience and potential for development. Now also with the help of cryptocurrencies.
To date, a total of $ 1 million from the Goldfinch protocol has been used, and funds have been provided for more than 10,000 borrowers.
Providing loans without collateral is only the first step.
The company plans to build a decentralized lending platform that will allow anyone to be a lender. This will be possible through a decentralized network of underwriters.
After all, underwriting is traditionally expensive for banks - analysis and assessment of potential borrowers, since they do not know them. Because of this, a barrier is set up for creditors and the lion's share of opportunities is cut off.
The protocol will allow anyone to become an underwriter. The underwriter will evaluate credit businesses and participate in junior debt capital, and in return receive higher returns from senior passive debt investors.
Thus, the protocol will scale up the credit scoring process and add new lending companies with the help of the community.
Over time, the protocol will support smaller and smaller lenders as long as anyone can make loans, even an individual. This will be possible because the protocol brings end-user loans to the on-chain and provides tools for self-service loans, leveraging the rapidly growing underwriter market.
I hope we will see it someday.