Crypto is a circular system where whales borrow money against their fortunes to pump up ponzi schemes and toss those tokens to retailers betting these coins are the future of finance.
That’s one way to think about crypto.
Other? Crypto makes loans to people doing business in non-crypto sectors of the economy. Blake West is pushing this angle.
West is the co-founder of Goldfinch, a platform that “brings crypto lending to the real world.” On April 26, Goldfinch’s loan book hit $100 million. Last February, the protocol had $1 million in loans. The milestone shows there is an urgent need for unsecured capital, particularly in the developing world, West says.
“Goldfinch offers these real-world loans tied to real-world activity [and] still has really good yields,” West told The Defiant.
He pointed out that the yields on the log compound financing are around 2%, while Goldfinch’s senior tranche is more than 8%. The protocol offers the senior tranche for passive investors and a higher-yielding junior tranche for “backers” who actually make investment-based proposals and negotiate with borrowers.
Unsecured lending, especially to smaller borrowers, is a risky business. Platforms don’t just have to worry about default values. Regulators can also step in with new regulations to protect borrowers, which can increase capital costs and day-to-day operations. Add in crypto’s volatility and it seems the risks can be even greater.
West says that Stieglitz’s loans are not tied to demand within crypto, so interest rates differ from those derived from yield farm demand, for example. Instead, the protocol makes loans to companies like Green way which sells highly efficient and safe cooking stoves in India. The platform issues loans in 18 countries, including Brazil and Kenya.
The model has made headlines: In January, Andreessen Horowitz led a $25 million investment round in the startup; Hedge fund manager Bill Ackman also attended. A16z General Partner Arianna Simpson said Goldfinch is able to bring DeFi lending to borrowers in emerging markets who lack collateral to obtain conventional lending.
“Goldfinch is a decentralized lending platform that expands the pool of potential lenders beyond banks.” Simpson posted.
To this end, Goldfinch counts fintech companies among its borrowers that facilitate lending in their respective fiat currencies. According to West, the next step for these fintech companies is to lend directly to their customers’ wallets.
Goldfinch has rivals. West said projects like Centrifuge, maple financeand TrueFi move in the unsecured credit area. He claims “unsecured,” meaning the loan is unsecured, is a misnomer as the debt is collateralized by off-chain assets.
For example, when a smartphone finance company borrows money from Stieglitz, it gives people smartphones with payment plans. When people default, the phone company shuts down their service. Customers probably don’t want to owe money on a useless phone so they’re motivated to service the loan to the company, which in turn is paying back Stieglitz.
“Basically, all of the loans that we make are secured and indeed secured,” West said.
Given this dynamic, West prefers to refer to Stieglitz as a “loan protocol” rather than an “unsecured loan protocol.”
But despite the growth in credit volume, Stieglitz’s native token is cratering. GFI has lost almost half of its value since going live 11th Januarycorresponding CoinGecko. Naturally, the DeFi market has swooned, with the market cap for the sector’s top 100 names down 16% over the period.
While lending comes with regulatory and payment risks, Goldfinch’s $100 million milestone suggests that lending protocols with real value are emerging as a new growth area in crypto.
“Margin trading and whatnot only goes so far, but once you start tapping into real economic activity, DeFi can go into trillions of dollars instead of tens of billions,” West said. “I don’t think people in the crypto markets fully understand that DeFi growth is going to come here.”