DeFi credit protocols
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 99.1% at the moment.
As of this writing, 30 days trailing APY of the protocol is 9.77% which is pretty good during the crypto bear market. What makes it especially attractive is that it is real yield, not the kind of yield coming from inflationary tokens.
TrueFI is one of biggest on-chain credit protocols which originated $1.66 billions in loans. Overall, 146 loans were originated of which 144 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.
Maple Finance is an institutional capital network providing undercollateralized loans for premium borrowers on Ethereum and Solana platforms. What is a Borrower Pool on Goldfinch is called a Lending Pool on Maple Finance and is managed by a single Pool Delegate. A Pool Delegate assesses the Borrower’s creditworthiness. To get funding from a Maple Finance pool the Borrower submits her Request for Quote (RFQ) for a loan. Pool Delegates are responsible for negotiating with the Borrowers. After they review the Borrower’s RFQ, they request more financial information from the Borrower which they use to assess the Borrower’s reputation and set the interest rate and collateral ratio for the loan. Once Borowers and Pool Delegates come to an agreement about the interest rate on the loan and collateral ratio, the latter provides funds from the pool she manages to the former.
Loans Value Outstanding as of this writing (27th May 2023):
Most of the funds were provided to Maven 11 Capital, an investment fund focused on blockchain and distributed ledger technology projects.
And this is chart displaying loan pool average interest rates:
At the time of this writing, the rates on USDC and ETH pools are 9.7% and 6.7% respectively.