Ilja Krasnov
5 min readSep 25, 2021

What is Goldfinch?

Goldfinch is a new step in cryptocurrency lending. The field of decentralized finance or DeFi is one of the most popular sectors of cryptocurrency. At the moment, there are no collateral-free solutions in Defi lending. Goldfinch is the missing piece that can open up access to cryptocurrency lending for everyone. It is a decentralized lending platform for collateral-free cryptocurrency loans.

Goldfinch is a project that has colossal significance for the entire cryptocurrency ecosystem, and will soon overturn the general notion of credit services. If you ever need to take out a cryptocurrency loan, you will face a major limitation of existing cryptocurrency lending protocols — the larger the loan amount, the higher the amount of collateral in cryptocurrency. If you can’t find the funds you need, you’ll never take out a loan without collateral either.

But Goldfinch uses a “trust through consensus” protocol that allows borrowers to demonstrate creditworthiness based not on their crypto-assets, but on the collective assessment of backers. This protocol was created to solve one of DeFi’s biggest flaws: loans without any collateral. Going deeper, this protocol is also used for automatic capital allocation, but more on that later.

The company’s mission is to create a decentralized lending platform that expands access to financial services. The ideology is based on expanding the range of potential borrowers who can access cryptocurrency, removing the need for cryptocurrency collateral. The protocol is based on providing lines of credit to borrowers so that they can then use the lines of credit to get stabelcoins from the pool. Later, they exchange them for fiat currency, which they use as they see fit. Through access to a lot of capital, the usefulness of cryptocurrency is ensured, while leaving the actual granting and servicing of the loan to businesses that know their business. Also, cryptocurrency holders can make their deposits into the pool and then they will receive their interest after the borrower’s debt is paid.

How Goldfinch differs from other DeFi lending protocols.

The company has bet that by removing collateral from cryptocurrency lending, the protocol will noticeably increase the number of both potential borrowers who can access cryptocurrency and potential providers of capital. You can find many articles and each will argue that this idea is a novelty in the world of cryptocurrency, which opens access to this market for the entire planet.

The company has huge plans, because providing loans without collateral is only the first step. Next, they are going to create a decentralized network in which anyone can participate. This will create a whole new level of lending activity.

But even now you can distinguish 5 main differences from the competition:

1) All competitors require collateral to take out a loan. And in most of them, the amount of collateral must be even higher than the loan amount.

2) 4 participants in the process. We will discuss this further below, but many projects involve only the lender and the borrower.

3) The Goldfinch protocol even encourages offline interaction between chain members, to ensure quality evaluation and transaction security

4) Borrowers can only be official companies

5) A slightly more complicated and risky, but very profitable system for creditors

The main differences between senior pool roles and backers.

The Goldfinch protocol consists of four main participants: Borrowers, Backers, Liquidity Providers and Auditors.

Borrowers — organizations in need of financing. Borrowers offer their pools for backers to evaluate. The pools contain the terms and conditions that the borrower would like to receive. As an example of mandatory clauses, the repayment schedule and the desired interest rate on the loan.

Backers — people who lend their money to borrowers to generate income. Backers directly contribute their funds to the junior tranche of the borrower pool. At the same time, this capital is supplied as first-loss capital. This means that if the borrowers default, it is the backers who will be the first to suffer.

Liquidity providers — people who also lend their money to borrowers to generate income. To become a liquidity provider, you need to put your funds into a senior pool. This is the place where liquidity providers’ funds are stored. There, the funds are waiting for their time, which is when the protocol will automatically distribute them according to the leverage model to the senior tranches of the various borrower pools. But the liquidity providers get a lower return than the bakers.

Auditors — a defense working on human resources. You could call manual screening of borrowers and pools for fraud. Before borrowers can withdraw any capital, they must be vetted by auditors who will vote to confirm borrowers.

If I’ve confused you, in simple terms we can say that the role of a baker is a more complex and interesting role, but it has more risk than liquidity providers, although the income of bakers is higher.

Not only ordinary people believe in this project, but also large organizations. Large venture capital funds that invest in startups. And Goldfinch is just one of those.

Such organizations never invest in projects without potential. On the contrary, they look for such companies.

To summarize, the Goldfinch project really is an innovative development in the field of decentralized finance, solving the problem of liquidity in the loan market, providing participants with the ability to obtain unsecured loans, as well as the opportunity to become a lender, while receiving a stable passive income.

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