Unsecured loans, long a missing piece in the DeFi puzzle, may finally be coming to open finance.
Goldfinch, a DeFi platform that specializes in making no-collateral loans, announced an $11M raise from the likes of Andreessen Horowitz, DeFi Alliance, and other investors.
Goldfinch enables borrowers to garner access to unsecured loans without having to go to traditional banks. Invoking financial inclusion as a prime goal, the platform is betting its proposition will find traction in emerging markets as well as lower-income households in advanced economies frozen out of the banking system.
“Mike and I are really excited to bring crypto to the real world. We want to fulfill the promise of crypto to expand access of capital and financial inclusion,” Blake West, co-founder of Goldfinch, told The Defiant. Mike Sall is Goldfinch’s second co-founder. Both West and Sall worked together at Coinbase.
Goldfinch facilitates undercollateralized loans by splitting Borrower Pools into two junior and senior tranches. “Backers” assess the borrower pools to decide whether to invest their capital. Backers take the position of the junior tranche, meaning if borrowers default, the backers’ capital will be subtracted from the pool first.
In exchange for the risk, Backers get extra interest from the Senior Pool, if borrowers pay off their loans. According to Goldfinch’s whitepaper, this motivates Backers “to provide the higher-risk first loss capital and do the work of assessing Borrower Pools.”
As Goldfinch builds its loanbook, the protocol may open up DeFi to a vast new pool of borrowers. The model could also release liquidity in DeFi because overcollateralization means capital is locked up when it could be put to productive use.
Still, unsecured lending has long been one of the riskiest businesses in finance, and just because this is done on a DeFi basis doesn’t mean defaults just go away. Financial engineering involving tranches and senior debt holders did nothing to prevent the subprime mortgage disaster in 2008.
In any event, Goldfinch will be an interesting experiment to watch. Having the support of Andreessen Horowitz, the venture capital firm that backed Coinbase, Slack, and other blockbuster names, doesn’t hurt.
“The near future will be focused on building out the protocol as defined in the whitepaper,” West said. “We’ll be in a closed beta period for the next several months to iterate and then as time goes on, progressively decentralize,” he continued, outlining the traditional crypto playbook of starting centralized and slowly giving control over to a protocol’s community.