Community-driven Backer Rewards have launched on the Goldfinch protocol
Backers on Goldfinch can now receive staking rewards on their USDC pool contributions
Backer rewards are now fully live on the Goldfinch protocol, following the final upgrade to fully implement the community-driven proposal to launch them.
In January, the Goldfinch community governance proposal addressed the need to ensure that a Backer’s incentives are always higher than those of a Senior Pool participant’s, to preserve the protocol’s consistent risk/reward tradeoff and as a protective means to reduce system fragility.
Maintaining incentive alignment
By design, Backers on Goldfinch earn a higher reward rate than Senior Pool participants. Backers on the Goldfinch protocol evaluate Borrowers and supply first-loss capital to the protocol’s Backer Pools — the smart contract through which Borrowers on Goldfinch borrow and repay USDC.
Other Liquidity Providers supply Senior Pool capital to the protocol. This Senior Pool capital is automatically distributed across all Backer Pools according to the “trust through consensus” mechanism, determined by how many Backers choose to contribute to those pools based on their independent analyses of the Borrowers and their pool terms. The Senior Pool capital is the first to be repaid (second-loss). Thus, Backers have higher risk, which aligns their incentives with the protocol’s need for them to adequately vet Pools.
The newly-implemented community proposal helps maintain these protocol dynamics in the unlikely event that edge-case conditions could lead to the Senior Pool combined APY rising above the combined APY of a Backer Pool. This ensures that Backers are always receiving a higher reward rate in exchange for their work evaluating Goldfinch’s Backer Pools, and for taking on those Pools’ first risk.
Two kinds of Backer Rewards
There are two sources of potential Backer incentives implemented by the governance proposal. As succinctly described in the proposal, “Backers get what LPs get plus extra.”
Backer Rewards are distributed as GFI rewards to Backers for interest payments. For every dollar of interest that a Borrower repays, a Backer will earn an amount of GFI. To incentivize early participation in the protocol this amount decreases based on the total amount of interest that has been repaid to the Goldfinch protocol as a whole.
The protocol does this to incentivize Backers who are evaluating pools to fully take into account the likelihood that interest payments will be made successfully and on time to the Pool, and to provide an incentive for Backers to hold Borrowers accountable to their obligations.
How much GFI a Backer earns for a dollar of interest repaid is not a fixed value. Early interest payments made to the protocol are more impactful for the growth of the protocol than interest payments made much later. Because of this, the Backer Rewards system rewards interest payments made earlier in the protocol’s life cycle significantly higher than those made later on. You can learn more about the mechanics in the community’s governance proposal.
Backer Staking Rewards take the form of GFI distributed to Backers in exchange for their role taking on the additional risk of providing first-loss capital to Backer Pools. This is achieved by providing Backers equivalent GFI rewards as if they had deposited and staked in the protocol’s Senior Pool, in addition to their rewards from participating as a Backer. The protocol does this so that Backers are compensated fairly for the increased risk they take on in the protocol if a Borrower were to default on their repayments.
Upon a successful repayment from a Borrower to their pool, a Backer will be able to claim the full amount of Backer Staking Rewards they’ve earned since the last time they claimed. Partial repayments do not entitle Backers to rewards. However, if a Borrower eventually does make a repayment on their outstanding obligations, Backers will not be penalized and will receive the same rewards as if the late/incomplete payment never occurred.
More opportunities to take part
All existing Backers will be able to participate in the new rewards immediately. Further benefits of this proposal’s design are that the new incentives do not require budgeting additional tokens from the Goldfinch Treasury, as the rewards are a derivative of the Senior Pool’s GFI staking mechanism and Backer Pool interest repayments, and that the deploy held limited risk to the protocol’s existing smart contracts and network dynamics.
The Goldfinch protocol recently implemented support for U.S. Accredited Investors and Non-U.S. entities to take part in the platform’s Senior Pool as LPs, and select Borrower Pools as Backers, widening the community of who can provide liquidity beyond Non-U.S. individuals.
Learn more about how Goldfinch works on our site and by signing up for our updates. Get started participating in Goldfinch as a Backer today at http://app.goldfinch.finance/verify.
