Authors : Obinna Okwodu and Aaron Collett
The Warbler team proposes to allow Borrowers on the Goldfinch protocol to create Borrower Pools that are unitranche in nature - meaning the pools will be filled only with backer capital and will not require any senior pool capital. This means the leverage ratio on these pools will be 0x.
Over the past few months, Goldfinch stakeholders have shown interest in introducing unitranche Borrower Pools via the protocol, driven by the following considerations, among others:
Limited Senior Pool capital: The Senior Pool has not had sufficient USDC to contribute its usual 4x leverage to Borrower Pools, which has prevented pools from closing. Until more senior pool capital is available, the unitranche structure will allow for funds to be raised independent of Senior Pool utilization
Different risk profile: A unitranche pool allows investors to have Borrower-specific exposure without taking on additional risk from leverage
Borrower growth: Borrowers want to raise and deploy capital on Goldfinch, and high Senior Pool utilization has recently been a blocker to launching new pools
For the Goldfinch community: This would represent a different fundraising mechanism that serves both capital providers and Borrowers while growing the protocol’s TVL. Additional TVL will contribute more fees to the Goldfinch treasury for the benefit of the community and its approved projects
Specification & Requirements
No smart contract changes are required as the current code can accommodate setting a 0x leverage ratio for a pool to achieve the desired unitranche outcome.
Some frontend changes will be required to communicate the structural differences of this deal. These include, but are not limited to:
- Removing the “Senior Pool” funding from the progress bar from unitranche deals
- Making the following changes to the Deal Terms table for unitranche deals
- Adding a “deal type” field, for which the input will be ‘Unitranche’
- Provide a new field on the Deal Page to highlight “Unitranche Structural Considerations” to clarify the different risk-reward of this deal type
- Add a tag to identify unitranche deals on the Earn page
- Allows capital providers to lend to Borrowers without the senior pool’s involvement
- Allows Borrowers to raise from Goldfinch without requiring senior pool’s involvement
- Potentially increases the active loans on the Goldfinch protocol
- LPs in the Senior Pool will not have exposure to any specific deals that are funded with 0x leverage ratios.
- Adds complexity to the Goldfinch protocol as there are now two types of deals that can get done - deals with leverage from the Senior Pool and deals without.
Yes: Allow Borrowers to create Borrower pools with 0x leverage ratios
No: Do nothing
This proposal indirectly undermines the liquidity of the FIDU token or at the very least it doesn’t help FIDU holders. By attracting capital exclusively to unitranche pools, the Senior pool would receive even less influx of liquidity.
Goldfinch should focus on onboarding more investors into their Senior pool so liquidity increases for everyone (including unitranche pools). Considering that 70% of the capital is currently locked with no way out, increasing liquidity of the Senior pool should be the priority.
This proposal is a distraction from Goldfinch’s original promise. It doesn’t benefit Goldfinch’s main supporters (the Senior pool investors). I’ll vote against.
This is definitely a tough situation to be in - if you raise the FIDU return to attract more capital, then your existing borrowers might struggle with the cost of capital, and backers on existing pools may see their yields decline. However, rebalancing FIDU capital distributions such that the existing borrower pools have less leverage could allow for these new pools to launch, but again, would potentially negatively impact backer tranche yields.
In tradfi structured credit, there are such concepts as delayed draw tranches (in some US CLOs) that allow the issuer to draw senior capital after issuance, and asset-based warehouse lines also have committed lines of capital that allow for multiple subsequent draws, though these concepts are meant more to address the problem of too much capital vs not enough assets. I think this is a challenge that Goldfinch has the opportunity to innovate on, not just in RWA DeFi/crypto, but in the structured credit industry as a whole.
However, in reality, I’m certain these potential new borrowers are not willing to wait for innovation and want execution sooner, so such a workaround for the sake of execution makes sense.
That said, I think it would definitely help to have some sort of plan in place (if not a fully fleshed out plan, at least some thoughts to start a process) to retroactively allocate senior capital as it comes in to these sort of deals.
Alternatively (might be going off the deep end from this point), perhaps a separate blended backer pool (I’ve had discussions with some community members about the concept of a BIDU/JIDU pool that effectively is like a FIDU but for backer tranches) could be set up to invest across all backer tranches, including unitranche deals, and the FIDU could allocate some capital into this blended backer pool (so that way the leverage requirement won’t be a blocker for new pools, and FIDU holders will still have some exposure to the unitranche deals).
Hi @holl - Thanks for sharing this. It’s worth mentioning that this effort does not take away from the work being done by the community to attract capital to the senior pool. There is increased demand by some capital providers in the community to continue to lend to single borrowers on the protocol and not be diversified across all borrowers via the senior pool. Unitranche pools will give these capital providers the ability to do so while allowing borrowers to continue to raise capital.
@JeremyKim - Yeah, I totally agree; there is an opportunity for the Goldfinch community to use the composability and liquidity of the blockchain to innovate in structured credit!
Interesting point as well on blended backer pools, and something I’ve discussed as well with members of the community as well. I could see this as an evolution of unitranche pools in the future.
Both things are perfectly compatible, it is not either one or the other. The demand for unitranche pools can be satisfied together with the Senior pool (as was initially promised) and that way the $79 million locked on the Senior pool would benefit as well. There is no reason to justify launching exclusively unitranche pools except to generate fees.
80% of the capital is currently locked in the Senior pool and that wasn’t how Goldfinch was supposed to work. This proposal is a distraction from this fact, which is severely affecting the majority of Goldfinch backers.
@holl I understand your concerns here. But under the current construct, Borrowers on Goldfinch, who need capital to continue to grow their operations, are unable to raise from Goldfinch right now. This is because the protocol’s multitranche structure is hinged on the availability of senior pool capital.
Unitranche pools allow these borrowers to raise capital while giving some capital providers the ability to continue to fund borrower pools independent of the availability of excess senior pool capital.
That said, this effort does not take away from the work the community is doing to drive liquidity into the senior pool, nor does this mean all pools moving forward will be unitranche in nature. Driving liquidity to the senior pool continues to be a top priority for the community.
@Obinna I fully support this proposal as I’m interested in supplying capital to new pools and current issues with Senior Pool don’t let me do that. However, I’m curious to know if unitranche pools will be considered to be riskier, i.e. have a higher APY compared to the ones with the senior pool’s involvement
I’m curious to know, why the current conditions don’t let you fund the Senior pool today? You could deposit today to the Senior pool without issues. Your capital will be locked which is exactly what would happen if you deposited on a unitranche pool.
I’m interested in earning higher APYs. @holl
That’s valid, and just to clarify for everyone Unitranche pools pay higher APY because you lock your capital for up to 4 years with no liquidity windows and you are fully exposed to the risks of just one lender without diversification.
Understood. But that’s fine if you do some DD before supplying capital and don’t go all in. I believe unitranche pools to be a good way to diversify portfolio with some riskier positions, which may bring higher yields @holl
Absolutely, and that’s why many of us became backers of Goldfinch, it was beautifully designed offering two types of opportunities (Senior and Junior/Unitranche) for different risk profiles. My point is that Unitranche pools should continue being launched together with the Senior pool as that was the promise made initially and Senior pool holders don’t have a choice right now to remove their support for this new model.
Afaik community has come up with GIP-25 to solve withdrawal issues with SP.
It was also reported from WL side, that:
• The core smart contract work is complete and audited
• The dev team is finalizing work on the front end to enable folks to submit withdraw request in the Dapp
• Main remaining work is end to end testing to ensure everything is working correctly
Timeline for launch of these initiatives is sometime in November. Hence, all efforts are quite synced, aren’t they? @holl
Ok, what do you think about waiting for GIP 25 to be live so we all have an option to decide after we see the system working? That should be a decent compromise.
I have my capital locked right now in the SP and I can’t witdraw it either for obvious reasons, but I cannot see a direct link between this proposal and the current issue with SP, which is being resolved now. If this proposal was spinning around a new investment opportunity with SP, I would be happy to agree with you.
I would rather have an opportunity to invest some part of my capital into new unitranche pools, enjoying higher APY and waiting for the GIP-25 to go live. Once GIP-25 is live, I’ll use an unlocked capital to participate in membership vaults according to GIP-27 and GIP-13.
However, just to clarify once again - in my opinion my locked senior positions have nothing to do with junior ones. I consider them to be different even in terms of risks. @holl
The connection between this proposal and the fate of SP investors is straightforward: if Goldfinch hasn’t been able to attract enough capital into the Senior pool when it was the only option available, then liquidity for the SP would be even worse if new capital can choose to circumvent completely the Senior pool and invest exclusively in Unitranche pools. It’s a major digression from the original plan that we as Senior pool investors agreed upon, which was that Senior pool and Unitranche pools were complementary and SP investors would get both liquidity and diversified exposure.
@holl hm, but no one says that there will be no more pools requiring senior pool’s involvement.
Right now SP investors are hostage of the situation and GIP 25 is supposedly imminent, why not wait a few days more to see it live so we all can have a choice to decide about major changes in the protocol?
@holl I think one major point you are missing here is that, even if no new capital comes into the senior pool for the next two years, all senior pool investors would be able to withdraw their funds as borrowers start replaying their loans completely in the next couple of years. So, stopping unitranche pools for the sake of bringing more liquidity to Senior pools doesn’t make sense to me. I agree with @RP2743 that they both are mutually exclusive and in no way compete with each other.
I would vote “yes” because I think bringing in more capital and lending it borrowers through goldfinch would make the protocol more usable and more relevant moving forward rather than getting struck with what the actual Goldfinch protocol structure was. It is always good to innovate and come up with new things right? I see no damage to senior pool investors because of Unitranche pools. We are struck with 100mn loan value for quite some time now. Let us increase it. Let us give an opportunity to people who would like to take more risk for higher APYs. Let people do their due diligence and take their decision. Let us drive more loans and more value to the protocol. I would vote “yes”
And we cannot wait a few more days to see GIP-25 implemented (so people have an actual choice to decide) because…?