Large amount of people in the world don’t have access to capital markets, especially population of emerging markets countries. It’s hard for them to get loans from banks since they don’t have credit history, the interest rates of the loans are enormously high or banks just don’t want to work with small businesses. What is more important, it is most active population under 30, according to Euromonitor Internacional.
Crypto can help those people and give them access to capital. The main goals here are as follows: 1) to allow everyone to participate and 2) to assess which borrower is trustworthy. Nowadays, crypto protocols have the answer to the first part using blockchain technology, but the answer to the second part is quite disputable — using of collaterals. In simple words you need money to borrow money. These solutions are mainly used by cryptoholders or traders to borrow money for acquiring new assets without selling previous ones. Unfortunately, it is useless for majority of people, e.g. those who don’t have starting capital for business or money for urgent consumer spending.
The question here is whether there is another solution to trustworthiness and the answer is yes.
I would like to introduce you to a new protocol — Goldfinch, which actually propose new elegant way to lending. The main idea is to create strong community of educated protocol users who can due diligence, decide who is trustworthy and then put their own capital at risk.
The are 4 roles in the protocol — Borrowers, Backers, Liquidity Providers and Auditors. The protocol is quite young and works with lending businesses in emerging markets, such as Mexico, Nigeria and Vietnam.
These businesses act as Borrowers and create so called pools — smart contracts through which capital is borrowed and repaid. In other words, they propose terms to lenders (called Backers), provide necessary documentation, try to persuade Backers to invest first-loss capital.
Borrower pools consist of junior and senior tranches. Junior tranche is provided by Backers on early stages of pool creation. If protocol sees that enough Backers support particular pool, it supplies it with additional funds — senior tranche, which is provided by Liquidity Providers. To encourage Backers to put their skin in the game protocol 20% of the interest payments is reallocated from senior tranche to junior. Moreover, there are additional GFI token incentives for early Backers investing in the pool. Though the rewards for the Backers are pretty good, they take additional risk for that, since their capital is concentrated in specific pools and all interest payments firstly come to senior pool investors — Liquidity Providers.
It is also worth mentioning Auditors, who protect protocol from the fraudulent Borrowers, checking whether their business is legitimate. Borrowers can create pools only after the approval of Auditors.
The roles and their participation in the protocol are briefly described in the following schema:
To finalize, I would like to say I am incredibly optimistic about protocol and its consensus. I hope that their solution will be useful to small borrowers and lenders around the world.