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]:
- 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.
- Backers: Backers provide first-loss capital to the junior tranches of specific Borrower Pools.
- 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:
- Redeeming it for excess USDC in the senior pool [repayments, new capital coming in].
- 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:
- Default risk.
- 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.
).