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Why RWA on Goldfinch are insulated from on-chain DeFi volatility

Why protocols bridging off-chain investment to DeFi are insulated from the volatility seen in most of crypto’s yields

We’re halfway through 2022, and I’d argue most people agree it’s been a pretty wild ride — irrespective of whether or not you’re in crypto. Tech across the board is down anywhere from 24–71% on a year-to-date basis.

Tech across the board isn’t doing so well — F-Prime Fintech Index

It’s becoming clear that protocols bringing off-chain investments to DeFi, like Goldfinch, are insulated from much of crypto’s volatility. This is due in part to connecting dependable stablecoins to real-world assets (RWA). First, I’ll explain what Goldfinch is, its importance for on-chain credit, and why it was created with volatile markets (like we’re experiencing now) in mind. Then, I’ll explore how RWA-based lending differs from traditional DeFi lending.

Crypto has YTD lost more than 50% of it’s market cap

What Is Goldfinch?

Goldfinch is a decentralized credit protocol leveraging crypto to empower financial inclusion around the world. The Goldfinch community believes in a future where anyone, anywhere can finance the economic activity of anyone, anywhere. Since launching in early 2021, Goldfinch has doubled its active loans every 2 months (154x growth) to lend out $100M+ in loans, financing hundreds of thousands of real-world end borrowers across the globe.

The Goldfinch thesis is founded on two core beliefs:

  1. Over the coming decade, an overall suppressed rate environment (which is now changing) will drive investors from across the spectrum to demand new investment opportunities, while the transparency and efficiency of DeFi overall will drive investors to demand higher-yield opportunities than their traditional banks and institutions can offer.
  2. Global economic activity will move on-chain, making every transaction programmable, and thereby creating A) a new public good: an immutable, publically accessible credit history, and B) reducing hefty transaction costs of finance

The world is about to embark on a new experiment of unwinding quantitative easing (i.e. governments printing money to support local economies). Nevertheless, the below view shared by Goldfinch Co-Founder Mike Sall in early 2021 still holds true, as yields are about to rise from their lowest baseline in decades, and investors search far and wide for sustainable yields.

“For over a century, bonds have served as a foundation of yield. This has created a fallback for passive capital that puts pressure on other markets to beat those returns. But as bond rates hit zero and even turn negative, this will trigger a massive shift. Capital will look to other markets like stocks, inflating those asset prices and reducing yields across the board.”

— Mike Sall, Co-Founder Goldfinch, CEO Warbler Labs

The search for yield has even hit the crypto world. As one example, Compound, which recently provided up to ~11% USDC yields, is now at a near all-time low of 0.76%.

7 day moving average USDC supply rates on Compound

We believe the demand for new sources of yield will transition into more economic activity moving on-chain, creating a new public good — immutable, on-chain credit histories. Said more plainly, Goldfinch will help people in the real world create on-chain credit histories, infrastructure anyone in the world can then build on top of.

As boring as someone’s credit history (e.g. how many loans they’ve had, how often they’ve paid them early, on time, defaulted, etc.) may seem, credit histories are a core foundation of any scalable lending model. Your credit history forms part of the backbone of considerations lenders utilize to assess your ability to pay.

Imagine a world where the data surrounding off-chain real-world activity, were publicly accessible on the blockchain. Countless businesses could build on top of this credit infrastructure in order to expand access to financial services to people across the globe. While Goldfinch is currently building these on-chain borrower histories for fintechs who in turn service millions of small businesses, this is the first step in democratizing access to finance to billions who've been underserved.

Goldfinch is additionally employing the power of DeFi to reduce the hefty transaction costs traditionally associated with private credit markets, costs ultimately passed on to the ultimate end borrowers (i.e. small businesses or individuals). The IMF’s recent Global Financial Stability Report devotes an entire chapter to the power, utility, and cost savings DeFi infrastructure can bring to the real world. The IMF estimates DeFi could provide up to 12% in annual savings when comparing DeFi (far left column) vs. Non-bank Emerging Market sources of lending capital (far right column) replacing bloating real-world operational costs with efficient smart contracts.

Marginal savings of Defi vs TradFi — IMF

🍦 A Different Flavor of DeFi

Goldfinch is a decentralized credit protocol that offers USDC yields for stablecoin lending, generated by real-world economic activity and sheltered from DeFi’s volatility (plus, cited as some of the highest USDC yields in the industry by Messari and others).

How does the protocol remain more sheltered from crypto yield volatility seen across most of DeFi (e.g. BTC, ETH)? When many “traditional” DeFi lenders offer attractive yield opportunities to their users, the ROI being offered is usually generated by use cases tied to recursive on-chain actions tied to the performance of the wider crypto markets, dependent upon crypto price appreciation. In contrast, Goldfinch enables lenders to take advantage of the yields crypto has to offer, without being over-exposed to DeFi’s risk of a collapse in ROI when on-chain volatility hits, as Goldfinch’s USDC returns are generated by Borrowers operating with real-world assets (RWAs).

Goldfinch’s stablecoin rates, protocol revenue, and borrowing volume are holding steady while many protocols are experiencing a decline in core yield metrics. This is not a fluke, but rather a testament to the long-term stability of bringing real-world investment to crypto, as the rates Goldfinch borrowers pay arent tied to on-chain volatility.

Growth in Goldfinch Active Loans and Protocol Revenues — Token Terminal

Goldfinch is able to do this by utilizing USDC, a stablecoin fully and transparently backed by real-world assets. Launched in 2018 by Centre, a consortium led by Coinbase and Circle. USDC is a stablecoin pegged 1:1 to USD and backed by cash and short-dated US-government obligations (the “Reserve Assets”). The Reserve Assets are managed by asset managers such as BlackRock, and custody managers such as Bank of New York Mellon (who collectively manage +$11 Trillion in non-crypto assets, ~50% of the US GDP). Every month, Grant Thronton, an independent audit firm, provides attestation letters stating the Reserve Assets are at least equal to the USDC in circulation.

Goldfinch’s use of USDC for investment and borrowing, as opposed to other stablecoin alternatives such as algorithmics, further helps to reduce the risk of participation for investors. Specifically, Goldfinch’s participants are sheltered from the market risk associated with the unit of exchange they’re contributing to pools given the reserves backing USDC.

May’22 USDC reserves breakdown

❓ So how is RWA-based lending different from traditional DeFi lending?

In short, protocols like Goldfinch introduce:

  1. Track Record
  2. Real World Collateral (i.e. off-chain collateral)
  3. Different Risk-Reward Opportunities (including considerations of Inflation)

“Margin trading and stuff just only goes so far, but once you start tapping into real economic activity, that’s when DeFi can go into trillions of dollars instead of tens of billions. I don’t think people in the crypto markets quite understand that this is where the growth in DeFi is going to come from.”

— Blake West, Co-Founder Goldfinch, CTO Warbler Labs, to The Defiant

Track Record: Goldfinch has supplied ~$102M of capital to fintechs and credit funds who in turn lend to fintechs across emerging markets and the US. Those borrowers in turn are providing crucial services to their communities local banks generally aren’t willing to fill. Goldfinch’s borrowers have anywhere between 2–10 years of real-world track records, deploying capital for a wide range of productive uses from motorcycle taxis in Kenya, to small businesses in Brazil, to eco-friendly cookstoves for low-income households in India — just to name a few.

Real World Collateral: All Goldfinch loans are over-collateralized by off-chain assets, and are tied to real-world legal structures. Goldfinch loans to borrowers are not undercollateralized.

Different Risk-Reward Opportunities: Goldfinch pools aren’t tied to the performance of the wider crypto/DeFi complex. More specifically, the performance/volatility of ETH, BTC, Luna, etc. have no direct material impact on Goldfinch Borrowers’ ability to honor their repayment obligations. This is unlike traditional DeFi lending, where the risk of loss is directly tied to crypto asset values. Instead, Goldfinch borrowers face real-world risk factors, such as inflation, or COVID lockdowns. These risks, however, surface new potential rewards, as Goldfinch is helping to serve businesses with proven track records which have been historically underserved. Let’s take inflation, one of the most talked about real-world risk factors as an example. While the U.S. and other developed markets are dealing with records rates of inflation for the first time in a while (or in some residents’ lives), Borrowers in emerging markets have been living with high inflation and high-interest rates for decades (see below table). The OECD (a club of mostly rich countries) average annual inflation rate (bright red line) has been on a solid downward/sideways trajectory until 2022. So, while inflation and interest rates are certainly risks to consider, they aren’t a net new risk factor facing Borrowers in emerging markets. So while inflation is certainly a meaningful risk factor, emerging markets have a long history of working through bouts of high inflation.

Current and Historical Inflation and Interest Rates, World Bank, Trading Economics

🔍 So, Who are these Borrowers?

To set some context, Goldfinch surpassed the $100M mark in active loans distributed across both developed and emerging markets on April 26, 2022. The benchmark represents a 100X 🎉 increase in active loans from just a year prior for the 16-month-old protocol.

Goldfinch’s loans, which are over-collateralized by real-world assets, are spread across 28 countries (a growing number), including the U.S., Brazil, India, Indonesia, Mexico, and Nigeria — just to name a few.

Goldfinch Global Footprint

So who are these Borrowers? To provide a bit of a spotlight, the Goldfinch community recently onboarded two borrowers: Addem Capital and Lend East, who have extended Goldfinch’s respective reach into LatAm and Asia.

Have a read of the below coverageproviding a more intimate look at who these Borrowers are, why their missions are aligned with Goldfinch, and how they collateralized their loans with off-chain security:

Addem Capital — LatAm’s first Credit Fund to be funded by DeFi

Lend East — Asia’s first Credit Fund to be funded by DeFi

⛓️ Chaining it all together

So, how are the loans, the primary source of Goldfinch yields more insulated from the volatility seen in most of DeFi’s yield activity? Goldfinch enables lenders to take advantage of the yields crypto has to offer without over-exposing to DeFi’s risk, because the protocol’s USDC returns are generated by real-world economic activity.

So, while Goldfinch is sheltered from the volatility of many on-chain market movements due to its RWA nature, that certainly isn’t to say that Goldfinch is riskless — as real-world risks, such as credit risk, inflation, COVID, and whatever else comes our way, certainly do matter.

Nevertheless, the Goldfinch community has thankfully deployed over $100M to real world borrowers with zero defaults (live on-chain analytics), representing the future of how DeFi can grow past crypto money games to start actually building a new financial future.

Goldfinch has seen 0% losses — Dune

Goldfinch today is a decentralized credit protocol that offers USDC yields for stablecoin lending, generated by real-world economic activity and, as such, remains more sheltered from DeFi’s yield volatility. Further, by design the protocol is constructed to help shelter participants from DeFi’s volatility in the long term and to provide a more accessible, scalable alternative to traditional debt financing systems. To recap, the Goldfinch thesis is founded on two core beliefs:

  1. Over the coming decade, an overall suppressed rate environment will drive investors from across the spectrum to demand new investment opportunities.
  2. Global economic activity will move on-chain, making every transaction programmable, and thereby creating a new public good: an immutable, publically accessible credit history.

If you’re keen to learn more about Goldfinch, check out this fundamentals tutorial where Goldfinch Co-Founder Blake West shares a general guide on how Goldfinch works.

How to learn more about Goldfinch:

Sam is an early contributor to the Goldfinch protocol and the Chief Investment Officer at Warbler Labs, a core dev team supporting the Goldfinch protocol’s growth. Follow Sam on Twitter @seyob

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