Goldfinch protocol

Goldfinch aims to create a global credit marketplace where anyone can originate a loan. The process begins with the Borrowers proposing deal terms for credit lines called Borrower Pools which are smart contracts containing information on the loan, such as interest rate and payment schedule.

Once Auditors verify a Borrower Pool, investors can provide liquidity by adding USDC to the pool. There are two kinds of investors on Goldfinch: Backers, who directly supply liquidity to the Borrower Pools’ junior tranches, and Liquidity Providers who diversify their capital by investing in many pools’ senior tranches across the protocol.

Borrower pools on Goldfinch consist of junior and senior tranches. A repayment made by a borrower to a Borrower Pool first goes to the payment of principal and interest owed by the senior tranche. Once the senior tranche is paid, any remaining part will go towards to the payment of the interest and principal of the junior tranche.

This is by design – it aligns the incentives of participants. Recall that the system depends on the Backers who assess the viability of Borrowers. Since they take highest risk by supplying first-loss capital into the junior tranche, they have to do a good job to evaluate an individual Borrower Pool. Liquidity providers, on the other hand, are more secure because they have first lien on the pools. This means in case of default, they will be the first to be repaid. Since they bear less risk than Backers, senior tranches’ APY are less than that of junior tranches.

Liquidity pools on Goldfinch protocol are utilized efficiently. The chart taken from Dune Analytics shows that pool utilization rate has been over 98% since 2022 May; it is 98.7.1% at the moment.

TrueFI

TrueFI is one of biggest on-chain credit protocols which originated $1.7 billions in loans. Overall, 147 loans were originated of which 145 were repaid.

TrueFI lends funds to various borrowers, such as fintech start-ups and portfolio managers. To be able to borrow, an applicant should submit a proposal. The proposal contains information about the borrower’s business and how they intend to use the funds. TrueFI Credit Committee imposes several underwriting requirements, e.g. maximum leverage, which should also be met.

The advantages of borrowing from a large, decentralized credit market, such as TrueFI are lower financing costs, 24/7 access to global lending markets, and transparency which blockchain technology brings.