Goldfinch and how it differs from other lending protocols
Goldfinch’s Flight Academy training program was launched with great excitement the other day. Let me tell a little about this promising project.
Goldfinch is a decentralized protocol that allows borrowing in cryptocurrency without collateral.
The main limitation of the current cryptocurrency lending protocols is that they require excess cryptocurrency collateral, which imposes restrictions on existing borrowers and discourages widespread adoption of this type of lending.Through the principle of “trust by consensus”, the Goldfinch protocol gives borrowers the opportunity to demonstrate creditworthiness based on the collective assessment of other participants, rather than based on the value of their cryptocurrency assets.
The protocol uses this collective assessment as a signal for automatic capital allocation. By eliminating the need for cryptocurrency collateral and providing opportunities for passive income, the protocol significantly empowers both potential borrowers gaining access to cryptocurrency and potential liquidity providers.
Goldfinch is bringing DeFi technology into the real economy, so we should definitely check it out now, because Goldfinch’s mission is to change the nature of loans and make them more understandable to a wider audience.
What is Decentralized Finance (DeFi)?
Decentralized Finance (DeFi) is a decentralized, open source and reliable ecosystem of financial applications / services based on public blockchains, predominantly Ethereum.
What are the key features and benefits of DeFi?
Decentralization and self-government. DeFi lacks centralized governance structures: the rules for conducting business transactions are written in a smart contract. Once the smart contract is launched, the DeFi app can run on its own with minimal or no human intervention.
Transparency. The source code of DeFi applications is open to audit, which allows anyone to understand the functionality of the contract or identify bugs. All transactional activity is public in nature — transactions are pseudo-anonymous by default.
Trans-boundary. Most DeFi applications are available to anyone on the internet.
Inclusiveness. The DeFi ecosystem is inclusive — anyone can create and use an app. Unlike the traditional financial sector, there are no controllers and accounts that require complex forms to be filled out. Through wallets, users interact directly with smart contracts.
User experience flexibility. The DeFi ecosystem provides a flexible user experience. If the user does not like the interface of the application, he can use a third-party interface or create his own. Smart contracts are like an open API that anyone can build applications for.
Goldfinch at a glance
There are four main types of participants in the Goldfinch protocol: borrowers, bakers, liquidity providers, and auditors.
Borrowers are participants seeking funding and they offer pools of borrowers to sponsors for evaluation. Borrower pools contain the terms the borrower offers, such as the interest rate and repayment schedule.
Bakers evaluate the pools of borrowers and decide whether to provide a “first loss” fund. After sponsors provide funds, borrowers can make and repay loans through a pool of borrowers.
Liquidity providers provide capital to the senior pool for the purpose of generating passive income. The senior pool uses a leverage model to automatically allocate capital to borrower pools based on how many sponsors are involved. When the senior pool distributes capital, a portion of its share is redistributed among the sponsors. This increases the effective profitability of sponsors, which encourages them to both provide riskier first-loss funds and do the work of evaluating borrower pools.
Finally, the auditors carry out a borrower approval process, after which they are eligible to borrow. Auditors are randomly selected according to the protocol and perform identity checks to protect the protocol from attackers.
How does Goldfinch differ from other DeFi protocols?
The current situation in the DeFi segment is such that everyone who borrowed $ 1 provides their assets for ~ $ 1.5, and this fact really slows down the development of the system. However, this is a great opportunity for those who already have some capital to increase their working capital by blocking some of their funds in DeFi protocols, rather than selling them. In most cases, the borrower needs a loan at a time when he cannot provide it.
This is what Goldfinch is trying to change. No collateral will open access to capital, where proven companies in emerging markets can offer their loan conditions, and sponsors will decide whether to invest in this pool or not.
In terms of its structure and operating principle, Goldfinch is in many ways similar to the Tinlake platform, built on Centrifuge, a promising parachain of the Polkadot network.
The key difference between the Goldfinch and Tinlake is that instead of the “mixing” of real-world assets with the blockchain used in Centrifuge by using these very assets as collateral, Goldfinch took a different approach. It uses a cleverly designed sponsor incentive system, as well as auditor and baker screening and approval of borrowers by reviewing their documents and communicating directly with borrowers through channels such as chat, email and video calls.
The most important tool that ensures the security of the protocol and protection against “Sibyl attacks” (which is important due to the use of “trust through consensus” in the protocol) is the verification of the “unique entity” in order to establish that each borrower, sponsor and auditor is a unique entity. Providers of validation of unique protocol entities are approved by decentralized voting. These can be oracles that perform off-chain checks to confirm that wallet addresses are unique. However, the protocol design does not require oracles. If and when decentralized on-chain identifiers become widespread (for example, Zk-SNARK technology), the government can vote to move the protocol to these new providers.
Now, perhaps, it is worth remembering such an integral part of the cryptocurrency world as the Compound protocol. It is a “traditional” cryptocurrency lending platform offering loans up to 75% percent of the borrower’s balance. It is still an up-to-date protocol, offering a fairly simple and reliable borrowing system. I don’t think that with the arrival of such newcomers as Tinlake and Goldfinch, this platform will lose its position. Unlike Goldfinch, Compound offers faster borrowing and no identity verification. In fact, this protocol is useful if the user has a certain cryptocurrency that he does not want to sell (expecting its price to rise or saving on exchange fees), but needs liquidity to make transactions in the cryptocurrency market.
Goldfinch is one of the most promising projects that will help mature the still young cryptocurrency lending system in the near future. Applying a range of innovative ideas to tackle acute problems in their DeFi segment speaks volumes about the outstanding team behind it and instills optimism about the future of the market.