How does Goldfinch’s Senior Pool work?
Exploring the automatically diversified fund for real-world lending, optimized for ease and protected by Backer capital
- The Senior Pool is Goldfinch’s single diversified pool, optimized for ease.
- Senior Pool Liquidity Providers (LPs) supply USDC to the protocol’s Senior Pool, which automatically distributes capital across the network’s Borrower Pools according to the protocol’s leverage model. This mechanism ensures that the Senior Pool is diversified across many Borrowers.
- Senior Pool positions are represented by FIDU, a token which grows in value as interest repayments are made to the pool.
- LPs can withdraw from the Senior Pool by redeeming their FIDU for USDC whenever there is un-utilized capital in the Pool.
There are two ways to participate on Goldfinch as an Investor: as a Backer by participating in individual Borrower Pool deals, or as a Liquidity Provider by supplying capital to the Goldfinch Senior Pool.
Liquidity Providers optimize for diversification and ease. Liquidity Providers (LPs) supply capital to the Senior Pool, which automatically allocates that capital across the senior tranches (the segment that gets paid back first) of Goldfinch’s Borrower Pools according to the protocol’s Leverage Model.
By depositing in the Senior Pool, LPs can automatically diversify their investment across all Goldfinch Borrower Pools, based on the protocol’s novel “trust through consensus” community vetting mechanism.
You can learn more about how Goldfinch works in the protocol overview. Let’s break down how the Senior Pool works, and how to get involved as an Investor with an automatically diversified RWA portfolio.
Supplying senior capital
Borrower Pool smart contracts — where Borrowers on Goldfinch propose their loan terms and access funding — have both a junior and senior tranche, together accounting for 100% of a Borrower Pool’s funding.
According to the Leverage Model, when more Backers evaluate a Pool’s terms and decide it is viable enough to invest first-loss capital in it, the Senior Pool in turn automatically allocates more second-loss capital to the Pool. This means that 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 (Senior Pool) at that time, and then toward any interest and principal owed to the junior tranche (Backers) at that time.
In this way, Backers, who actively assess the viability of individual Borrower Pools, take on the protocol’s highest risk by providing first-loss capital via junior tranches. This incentivizes Backers to do an adequate job of assessing the viability of the Pools, as they will be the first to miss repayment in the case of a default — ensuring that the Senior Pool’s capital is always protected by the more active Backers’ capital.
Breaking down the Senior Pool’s yield
The est. USDC APY for the Senior Pool is a dynamic rate that changes as Liquidity Providers supply and withdraw funds, and as Borrowers withdraw and repay funds.
It is a reflection of two key factors:
- The Senior Pool’s current usage: The senior pool automatically receives its share of interest whenever an interest payment is made on a Borrower Pool. As more capital is added to the Senior Pool, the Senior Pool’s effective yield rate will decline as the repayments are spread across more capital.
- How much capital the Senior Pool has deployed across Borrower Pools: As more capital is supplied, increasing utilization, there will be more repayments, again raising the Senior Pool’s APY.
To compensate Backers for providing the work of both evaluating Borrowers Pools and providing first-loss capital, 20% of the Senior Pool’s nominal interest is reallocated to Backers.
You can view the calculations for how the Leverage Model affects the Senior Pool’s effective interest rate in the documentation.
Currently, Goldfinch’s Borrowers are established funds that access capital on Goldfinch to scale ongoing operations for profitable real-world businesses, expanding growth across successful sectors. While Goldfinch is global in scope (ex. 20% of protocol TVL supports US opportunities), the protocol launched to optimize for lending businesses in emerging markets, bringing the growing global private debt market on-chain.
You can learn more about this macro landscape and analysis in our recent post on Emerging Market Opportunities. Goldfinch has quickly scaled to date, with +$100m lent to real world borrowers across +25 countries and a 0% loss rate. Live ongoing Goldfinch portfolio statistics can be found here. You can learn more about the overall stability that bringing real business lending on-chain can bring to DeFi investors in our post on how RWA are insulated from on-chain instability.
When LPs supply USDC to the Senior Pool they receive an equivalent amount of FIDU, a composable and interest-bearing ERC-20 token representing their deposit. The exchange rate for FIDU increases over time as interest is paid to the Senior Pool.
This means an LP can fully or partially exit a position, or claim any portion of interest repayments, simply by exchanging FIDU for USDC — as the value of FIDU grows relative to their original USDC contribution. FIDU can be redeemed for USDC in the Goldfinch dapp whenever excess capital is available, at an exchange rate based on the net asset value of the Senior Pool, minus a 0.5% withdrawal fee.
The Senior Pool is designed to allow LPs to withdraw capital whenever they desire, with no predetermined locking period — as long as excess USDC is available in the Pool.
LPs can withdraw from the Senior Pool using the Goldfinch dapp when there is excess USDC by redeeming their FIDU for USDC at an exchange rate based on the net asset value of the Senior Pool. Withdrawals incur a 0.5% withdrawal fee contributing funding to the Goldfinch DAO treasury.
Various Goldfinch community members and third-parties have taken steps to create additional mechanisms via governance to withdraw capital from the Senior Pool when there is no excess USDC. For example, two community members created a withdrawal mechanism with a FIDU-USDC Curve pool.
Even when liquidity is low due to high utilization rates, as long as Borrowers repay their loans Goldfinch’s LPs will continue to earn yields — and even in the unlikely case of a long-term high utilization rate in the Senior Pool, LPs would still get their money back over the 3–4 years of the Borrower Pools’ underlying loan terms if all loans are repaid. You can learn more about accessing liquidity on Goldfinch in our post.
Conducting due diligence
There are four key ways to conduct due diligence on the Borrower Pools underlying the Senior Pool’s investment:
- Conducting research on the Borrower using both public resources and Goldfinch Borrower profiles
- Reviewing the in-depth dataroom provided by Borrowers, accessible through the Goldfinch dapp
- Joining the Borrower’s private two-way messaging channel and asking questions of the Borrower directly, or asking questions of other community members
- Post-investment, joining the Borrower Communications channels to access regular reporting, investor relations, private two-way communication channels with other investors, and to continue engaging with the Borrower
You can learn more about these resources, what financial data and metrics they include, and how to access them, in our post on conducting due diligence. While many of these resources are tailored toward Backers, who need to conduct due diligence in order to determine which Borrower Pool opportunities to invest in, they can also be accessed by LPs who want to evaluate Goldfinch’s performance overall.
For example, the post-investment Borrower Communication channels are specific to Borrower Pools and can be accessed by any Backer who participates in a Pool, but they can also be accessed by any LP with at least 10,000 FIDU held (in order to ensure adequate protection of Borrowers’ private performance data).
Currently, participation in the Senior Pool via the Goldfinch dapp is open to non-US individuals and entities, and US Accredited Investors and entities. The first step in becoming a Goldfinch Investor is to register a UID to verify your identity. You can get started by following the Investor Guide in the documentation. Or, if you already have a UID minted, simply connect your wallet to app.goldfinch.finance and select the Senior Pool on the Earn page.