AIP - 28: Invest Angle Reserves in Goldfinch's Senior Pool

Author

This is Punia on behalf of Warbler Labs, a founding development team supporting the Goldfinch Protocol.

Goldfinch is revolutionizing the $1T+ global private debt market by first allowing credit funds and FinTechs to access cost-efficient crypto loans. Goldfinch provides crypto lenders with access to debt deals collateralized with real-world assets that have been historically inaccessible outside exclusive networks.

Goldfinch to date has maintained a 0% default rate across a currently ~$100m in loans deployed.

Here are some high-level stats about our protocol:

Here are some key links to learn about our protocol:

Context

At a high level, our protocol has 3 main components live today [please look at the docs and whitepaper for a more complete view]:

  1. Borrower Pool: Borrowers propose a Borrower Pool that defines the terms of their loan. This includes term length, interest rate, payment frequency, and other relevant pieces of information.
  2. Backers: Backers provide first-loss capital to the junior tranches of specific Borrower Pools.
  3. Senior Pool: The Senior Pool is an automatically diversified fund that allocates second-loss capital across the senior tranches of all Borrower Pools, and thus represents a fully diversified position.

Borrower Pool smart contracts have both a junior and senior tranche, which together account for 100% of a Borrower Pool’s capital. Backers supply capital to the Pools’ junior tranches, and the Senior Pool supplies capital to the Pools’ senior tranches.

When a Borrower makes repayments to one of their Borrower Pools, the Borrower Pool applies the payment first toward any interest and principal owed to the senior tranche at that time, and then toward any interest and principal owed to the junior tranche at that time.

Liquidity Providers [LPs], who provide capital to the Senior Pool that is automatically allocated across Borrower Pools according to the actions of Backers, take on less risk by providing second-loss capital via senior tranches. This provides Liquidity Providers with the added security of knowing that they will be the first repaid if a Pool that was evaluated positively by Backers does go into default.

LPs get an ERC20 token, FIDU, representing their position in the Senior Pool. This is similar to the cUSDC token you get for depositing USDC into Compound. FIDU can be staked either directly, or paired with USDC through a Curve FIDU:USDC LP position, to earn yield from GFI tokens.

FIDU can get redeemed for the underlying USDC by:

  1. Redeeming it for excess USDC in the senior pool [repayments, new capital coming in].
  2. Selling it for USDC on secondary markets. There is currently a market live on Curve and the DAO is considering moving to other, more efficient, DEXs in the future.

Angle has an opportunity to get yield on your reserves that is senior secured and sourced from economic activity that occurs off-chain, and thus increases the diversity of the strategies currently employed. Furthermore, the yield the senior pool offers is higher than both the lending protocol strategies, folding strategies, and the stETH strategy currently employed.

Proposal

We propose allocating $5M of the reserves to a strategy that deposits the capital into the Senior Pool in Goldfinch.

Currently, this strategy is already being used by Yearn to allocate capital from its USDC strategy.

Warbler Labs is currently structuring a fund where we guarantee a certain portion of the investment as liquid for specific partners. We call it “backstop capital” and it will live permissionlessly, onchain.

We can guarantee that 10% of the $5M allocation towards the Senior Pool will always be redeemable, for 365 days after the investment, by Angle at the prevailing sharePrice of the senior pool, even in the event there is no liquidity in the primary or secondary market.

Implementation

As we have already worked with Yearn to deploy a strategy for their USDC vault, the Warbler Labs team can spin up a similar strategy for the Angle reserves as well.

This will require minimal to no work from the Angle DAO.

Value to the Protocol

Currently, all of the lending strategies for the reserves are dependent on on-chain economic activity and are quite prone to cyclical bull and bear markets, as well as tail risk events like the UST collapse and de-pegging of stETH.

The Goldfinch senior pool provides the safest and most diversified way by which one can get access to yield driven by off-chain economic activity. Our yields are much less volatile, sourced from real off-chain economic activity across 20+ different countries and thus much less exposed to any one single regulatory and economic regime.

All lending done through Goldfinch is collateralized by the borrowers’ assets through off-chain legal agreements. Even in the event of a default, the lenders through the protocol have claims on assets to recover their loan.

Finally, the yield on the Senior Pool is currently [9/13/2022] 7.81% in USDC, and 14.01% with GFI rewards. This is quite higher than all the current strategies employed by Angle as described in the docs here: https://docs.angle.money/angle-core-module/lending. This increases the economic value flowing towards veANGLE holders, SLPs, and the protocol.

Risks

There are 2 main risks for Angle:

  1. Default risk.
  2. Liquidity risk.

As the Senior Pool represents second loss capital, there would have to be a default rate of over 20% among the junior pools in order for the senior pool to begin losing money. Even in this current macroeconomic climate, default rates in private debt sit at 1.18%. Do note that these are generic private debt default rates, and Goldfinch has historically had 0% default rates as our protocol sources and underwrites incredibly high-quality, low risk borrowers with proven track records.

Source: Proskauer 2022 Q2 Private Credit Default Index

Currently, the main way to exit the senior pool is through selling on the Curve pool as direct withdrawals come on a first-come-first-serve basis. However, we are working on a withdrawal mechanism that allocates repayments pro-rata to the FIDU token holders that want to withdraw in a given epoch [likely 1-month]. This makes claiming your capital back far more predictable. We will be sure to share more details as they become public.

In order to hedge against any liquidity risks, Warbler Labs is offering the backstop capital pool to strategic partners. Through integration and sales efforts by the DAO, we expect there soon to be enough liquidity on the primary market to cover any redemption needs.

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I don’t understand clearly what is added value for Angle ! The goal of Angle is to have the best/most powerfull/most secure stable coin agEUR. I don’t understand how AIP-28 goes in that direction (But I may not understand). Kind regards.

Thanks for putting up this proposal @puniaviision!

Some comments here:

  • Angle strategies are not designed to have some illiquidity meaning that we cannot remove 1m from Compound but 0 from Goldfinch. This is potentially a design flaw we need to improve in the future but this is how it is at the moment
  • The liquidity backstop and the Curve pool guarantees that we can exit our Fidu to USDC when needed, but if we lose some TVL before regaining again: well in this case we may have drained all the backstop, meaning next exits will have to happen on Curve, which will expose the protocol to some potential losses if it has to reduce its invested amount on Goldfinch
  • That being said, it’s true that potential yield can be far higher than everything we have so far (even though would be great to have more than one year of data and a more important repaid amount - at least greater than the 16m so far)
  • A potential good setup would be to use the protocol surplus and on smaller amounts

Currently, the protocol actively uses its reserves to generate yield that flows to ecosystem participants. What is talked about in the docs here: Lending Strategies - Yield on Reserves - Angle Docs.

This AIP targets a way by which the protocol can massively increase the yield it is getting on its assets.

Appreciate your thoughts here!

Wanted to point out some dashboards on Dune that may be useful:
Goldfinch overview dashboard: goldfinch
Borrower impact dashboard: Goldfinch Borrower Impact Estimates

Dear @puniaviision ! Thank you for your answer ! Sorry for being rude… I was afraid that more complexity can add more risk and therefore cost/benefit was not so clear for me. Kind regards.

Not at all!

Going through the points brought up here:

Certainly very open to amending the proposal for smaller amounts. Is there a dashboard tracking protocol surplus that we could reference to get a gauge?

Additionally, do you think investing a part of your DAO’s treasury instead of the reserves as a form of treasury management could be a better fit here?

While the protocol only has a 1 year track record, the Borrowers we work with have been in business for much, much longer.

Some of Goldfinch’s Borrowers include PayJoy in Mexico, QuickCheck in Nigeria, Divibank and Addem Capital in LatAm, Greenway through Almavest in India, and Cauris in Africa, Asia, and Latin America.

More information about each of these funds can be found here: https://gov.goldfinch.finance/c/borrowers/16.

A few things to mention here. Firstly, we are open to changing the liquidity guarantee percentage. Let us know if a different figure changes the calculus for you.

Secondly, we are planning on implementing new Withdrawal Mechanics. This mitigates the risk of having to take a huge haircut from Curve as most investors will be using this mechanic to get their money back, and not selling on the Curve pool. So the discount on the Curve pool will be significantly less than what it is today.

Totally support it being a strong believer in both Angle and Goldfinch Protocols!

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As an investor in both senior pool and backer pools (almost 4 of them) since August 2021, I can vouch for the Goldfinch protocol, it’s team and the quality of borrowers on the protocol. I invested in Goldfinch just as a hedge against bear market in Crypto. I was looking for something that was completely uncorrelated to Crypto and as all the borrowers on Goldfinch are from real world and their performance has nothing to do with Crypto market’s performance, I took a chance. Till now, I am glad I invested in Goldfinch because my crypto portfolio fell by 80-90% since 2021, but my investment in Goldfinch is stable and providing me most of my monthly income from Borrower pool’s interest payments (which are paid on time every month. Not even a single month delayed or missed payment till now :crossed_fingers:).
The interest I get from Senior pool (Close to 16% if GFI rewards are also included) is also relatively more than many other standard lending protocols on Ethereum.
Conclusion: The above comments are my two cents as an average joe (who invested in Goldfinch). I tried to be as neutral as possible.
I support this proposal as I believe it is beneficial to both Angle (Higher Yield, GFI Rewards, Uncorrelated to Crypto Market) and Goldfinch (More liquidity in to Senior pool). A win-win situation!

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Thanks for your answer here!

You can track the protocol surplus in this Analytics. We don’t have gauges to allocate the surplus, decisions to invest or not are made on a 1:1 basis.
And I do think that if we were to move forward, it’d be a better fit to invest part of the surplus rather than having a yield strategy.

Till what point are you ready to get I guess on this?

This is really interesting! When do you expect it to be live if voted correctly? Will the updated smart contracts be audited and will you have a front interface for this?

I fully support this proposal!

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Hello,

I am new to the Angle governance forum but a long-time follower and investor in it and also invested in Goldfinch.

I appreciate this proposal but my main concern is liquidity.
Given the Senior pool mechanism in Goldfinch, I would appreciate to have details regarding how Warbler would structure a fund on top of Senior Pool and how this “backstop capital” would be affect the performance.

I am not concerned by default rate as there is good alignement of incentive between originators and liquidity providers, borrowers have a strong track record and collateralization of loans. Moreover the Senior Pool shows consistent performance even in a difficult market.

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Got it. Per the dashboard, it looks like there is about $7M in surplus. Is it correct to say that the surplus is used primarily for the protocol’s treasury?

As $5M would be a significant chunk of the existing surplus, how do you feel about a $2M initial investment? That much will generate, around ~$200k in USDC interest per year, and another ~$100K in GFI rewards.

The GFI rewards are a super cool way to build alignment between the 2 DAOs. One that I think makes sense as Angle creates stablecoins and Goldfinch lends them out for economically productive use cases around the world.

Will follow up on this!

We expect this to be live in Q4 of this year. Happy to provide more clarity as we start building it out. Warbler Labs will be doing an audit of all smart contracts and there will be a FE interface.

We’ll have more implementation details on this coming soon. It sounds like your question is about the cash drag this would have on the Senior Pool’s performance. Because the Backstop Capital fund is not directly invested in the Senior Pool and is USDC allocated to strategic partners, it will not be decreasing the performance of the Senior Pool.

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