Hey everyone, let’s try to clarify key differences between Backers and Liquidity Providers in Goldfinch protocol.
First of all, let me remember that Goldfinch is a credit platform which provides loans without collateral. It is decentralized protocol which working in crypto world, so everyone now have an opportunity to become a lender. This is especially important for young companies that cannot get a conventional loan from a bank.
So, there are 2 key roles that provide capital for potencial Borrowers — Liquidity Providers and Backers.
Liquidity Providers — users who supply capital to the Senior pool in order to receive passive yield. Capital of Senior pool distributed among pools of Borrowers by a Goldfinch protocol automatically with using leverage model. So, Liquidity Providers haven’t any opportunity to decide to which Borrower pool their capital will be allocated.
When Liquidity Providers submit their capital to the Senior pool, they receive a FIDU LP token that allow to withdraw or deposit funds from the Senior pool.
Backers —users who provide their capital by Junior tranche directly to the chosen Borrower pools. Backers allocate to Borrower pools the first-loss capital, so Backers forced to take increased risk. For this reason, Backers are interested in having the maximum amount of available information about Borrowers.
Backers have the opportunity to make deep check borrowers, including making legal off-chain agreements with them.
To incentivize Backers to supply Borrower pool early on, the protocol provides an additional GFI reward to all Backers who contribute early on.
Backers may also evaluate other Backers by staking GFI directly on another Backer, and earn additional reward from protocol in GFI.
Let’s make a table and note in main differences between Backer and Liquidity Provider roles:
So, finally, comparing these two roles, we can conclude that they balance each other. Backers can have higher yields, but at the same time they have increased risks, and also have to do the work of assessing Borrowers. Liquidity Providers receive lower returns compared to Backers, but have much more lower risks.
