GIP-62: Allocate GFI token from treasury for principal loan losses

Proposals
1

Authors : nanojohn

Summary : Goldfinch should use a portion of its GFI token treasury reserves to raise USDC at current market capital valuations, which will in turn be used as emergency funds to make principal loan payments in cases of current & future defaults.

Motivation: The Goldfinch protocol is currently experiencing a much higher than anticipated default and principal recovery rates for FIDU token holders & junior backers. Meanwhile, the GFI governance token has appreciated > 200% year-to-date and currently sits at a $300mm+ circulating market cap. This has put supporters of the protocol in a difficult position where the “safer” loan portfolio token holders may experience material loss in value, while the “riskier” governance token holders may experience material gain in value. Using treasury GFI tokens to help lessen (or even eliminate) the losses of early FIDU/backer supporters who lent USDC to “credit-worthy” borrowers would go a long way in restoring trust in the protocol owners and balancing the risk-reward tradeoff.

Specification & Requirements:

  1. A fixed amount of protocol GFI reserves (for example, 3,600,000 tokens) will be allocated for liquidating into USDC stablecoins.
  2. Warbler Labs will source OTC liquidity or conduct open-market sales of GFI over a period of no more than 2-4 weeks.
  3. USDC will be held in the treasury account and only be used for principal payments for defaulted loans. At the discretion of Warbler Labs, the USDC could be held in extremely safe, stablecoin yield bearing assets such as crypto protocols that allow for US Treasury investments (~4-5%) or otherwise.
  4. Once all principal payments are completed to FIDU / backers, any leftover USDC + interest earnings remaining will roll into the general treasury and can be used for future governance needs.

This proposal requires the creation of the following protocol parameters:

  • *GFI tokens to allocate OR USDC tokens to raise: The # of GFI treasury reserve tokens to liquidate for stablecoins OR the target amount of USDC to raise from GFI treasury sales. We are initially proposing a target of $15,000,000 USDC, which represents ~3.6mm GFI tokens or ~15% of treasury holdings.

Benefits:

  1. This proposal would operate as a long-term measure to help alleviate the concerns of the community and early supporters of the protocol, who have been excited to be a part of the earliest RWA crypto project, bringing credit loans on-chain. This is NOT a substitute for trying to maximize recovery on every outstanding loan, and should be done in conjunction.
  2. It will bring trust and faith back to the community members who have long supported Goldfinch and Warbler Labs. This will benefit not just the Goldfinch project, but all current & future projects from Warbler Labs, such as the recently launched Heron Finance. If Goldfinch loan lenders experience severe principal losses, it will impact Heron Finance’s ability to convince future lenders to trust them with their capital.

Drawbacks and Risks:

  1. This amount of liquidation will negatively impact the price of GFI token holders in the short-term, but I think in the long-term it will bring much greater value by restoring faith in Warbler Labs and the governance.

Voting :

Yes: Allocate a specific amount of protocol GFI reserves to sell to raise USDC for any future principal repayment defaults for FIDU holders and junior backers.

No: No allocation of GFI reserves

7 Likes
2

I am in favour of this proposal.

Protocol token serving as a backstop for protocol creditors (aka LPs or lenders) has been quite standard in DeFi – and the analogy could expand to company shares and creditors.

Now the extent to which GFI can serve as a backstop should also be limited and defined in advance, so that token holders are aware of their exposure.

Senior pool LPs and backers are entitled to expect a similar outcome to that of Stratos and Tugende, but Goldfinch might also benefit from setting limits to the guarantee it provides that its partners selection, underwriting and loan follow up is dependable.

This proposal does a good job at solving the current situation while setting a clear framework and a path forward for the future.

3

Hi nanojohn,

That sounds like a good proposal and I would support it, however, I think it should come as a complement of Warbler stepping in with Warbler’s balance sheet (as they did for Stratos), in particular when we have clear cases of lack of monitoring from Warbler (which is extremely obvious in the case of LendEast).

For context, Warbler has been raising $11m Series A and $25m follow-up round as per Crunchbase, and got allocated 4.4% of the total GFI supply (around $20m at today’s value), so Warbler has the financial means to partially step in. We cannot force Warbler through governance to use their balance sheet (but as I don’t think a governance proposal can win without their support, the decision on protocol treasury is also dependent on them). The key advantage is that the cost would be split between the two entities and thus the cost for the protocol treasury would be even more minimal.

I would also add that future recoveries should be distributed pro-rata of their respective contribution to the protocol treasury and Warbler.

When adding Warbler contribution and future recoveries to the equation, we can expect that the actual cost to the treasury would end up being much smaller than 3.6m GFI tokens.

1 Like
4

Agree with this too.

@nanojohn mentions that the treasury could sell GFI on OTC markets, hence minimizing the impact on GFI price. It can be imagined Warbler Labs participates in the demand side of said OTC trade, with parameters to be negotiated between them, Goldfinch and the community.

1 Like
5

I think as a short term solution this seems fine and I’m on board.

However, my concern with this solution is that it seems like a bandaid for when enforcing the standards and rules of borrowing are broken. There should be collateral that Warbler, or whoever the enforcing party is, can claim and use that for recouping losses. I understand this takes time, however this isn’t mentioned at all in the proposal. This aspect is missing from the proposal and seems to set a precedent that whenever a borrower defaults there will be the Treasury there to bail out lenders while leaving the recouping of losses out of sight and mind. I’m sure this is not the case, however I think it would be helpful to outline how the recouping of losses will affect the Treasury. Will those assets be used to purchase GFI tokens and resupply the Treasury? How will enforcing be changed to better mitigate defaults? Will there be new processes introduced to improve the protocols ability to detect defaults earlier and prepare investors in advance for the potential loss mitigation process?

I believe in the project however it seems to hinge on its ability to enforce off-chain loss mitigation and this proposal seems to lean away from going after off-chain assets and more to the tune of how do we stopgap the current situation. Hopefully this short term solution doesn’t come back to bite us :sweat_smile:

1 Like
6

Thanks for wrapping it up! @nanojohn
After reviewing yout proposal to allocate GFI tokens from the treasury for principal loan losses, I wish to express my reservations due to the following reasons:

  1. As a GFI Holder: Liquidating GFI tokens could significantly decrease their value, which is contrary to the interests of token holders like myself.
  2. As an Investor in Various Pools: The proposal appears to favor certain investors (e.g., LendEast backers) over others like me in similar situations (e.g., Almavest 3), which raises fairness concerns.
  3. As a General Investor: The proposal undermines the risk-reward balance inherent in investments into cryptospace. Investors should acknowledge and accept the risks associated with the attractive yields and the opportunity to invest in a less bureaucratically encumbered environment.

I believe we should prioritize maintaining the ecosystem’s integrity and ensure fair treatment for all community members without compromising the foundational principles of cryptospace.
Hence, I cannot support your proposal.

7

Hi @nanojohn, thanks for putting together a concrete proposal here. Let me start by saying that both I personally, and Warbler Labs as an entity, hold significant exposure to the Senior Pool, various Backer positions, and GFI. So we’re all in this together.

With that context, I believe that using GFI to backstop these losses is not the most prudent course of action, for the following reasons:

Backers and LPs took on, and were paid for, taking on credit risk. GFI holders were not.

Backers read documents about loans and chose to go into specific deals. They were paid market interest rates for doing so, plus they (along with Senior Pool LPs) were even rewarded with substantial GFI to compensate for the fact that they were investing in early deals of the protocol. At current prices, roughly $10M of GFI was already given out to Backers (which is about 50% of the total money they put in), and roughly $40M to Senior Pool holders (also roughly half of what they put in).

GFI, however, is a governance token with the purpose of allowing the community to direct the future of the protocol. It was not designed or previously described to be a reserve asset to be liquidated to cover the protocol’s credit losses. So, GFI holders haven’t signed for this usage of the token, and any kind of action here should seriously consider more holistically the purpose of the token.

As an aside, it’s worth noting that Maple Finance actually built a whole reserve asset backstop system where people staked MPL tokens and the tokens were used as a backstop. They abandoned this system because the economics just don’t work.

It will create an unsustainable expectation for all future pools that creates a major moral hazard with borrowers and undermines the protocol’s value.

Doing a full backstop here has a large second order effect of basically enshrining the idea that Backers and LPs don’t really take risk. I don’t see how doing that here can provide any objective reasoning for ever not doing so in the future. Simply saying “this is the last time, we promise” is insufficient, because the same proposal will undoubtedly come up again if any future incident arises, and there won’t be a good explanation for why that time is different. And if that happens, then it could seriously undermine the protocol value as well.

It is also creates a terrible “moral hazard”. If Borrowers believe that the community will make up for any failure of theirs to repay, why worry about repaying at all? If they believe lenders will be happy no matter what, and therefore unlikely to hold them accountable both in public and in the courts, why worry about their obligations? It’s hard to understate how negative the consequence of this could be not only for the current pools, but also the whole integrity and future sustainability of this protocol we’re trying trying build. Plus, the overall effect could actually be more net losses for the current lenders.

It may not be mechanically possible to sell this amount of GFI

This proposal tosses out the idea of selling $15M of GFI in 2-4 weeks as if it’s no big deal. Purely from a mechanical standpoint, given the current market depth, it’s unclear if this is even possible given the likely slippage that could occur. Current market depth is limited, and according to CoinGecko, Coinbase currently has 2% sell depth of only $32K.

Conclusion

Far from bringing “trust and faith” back, I think this proposal would do the opposite. It may seem like the GFI is “just sitting there”. But it’s not that simple. GFI should be used to improve the protocol, not undermine it’s own value. Using GFI here is an extremely slippery slope, and it sets a dangerous, unsustainable expectation that impacts the whole future of the protocol. None of the previous backstops included any GFI, which is a very important distinction.

The current situation with Lend East is very difficult, but it’s critical that the Goldfinch community respond in a way that shows we are building a lasting, sustainable system for the future.

1 Like
8

Hi everyone,

As a very early supporter of Goldfinch and someone with quite a large exposure to both FIDU and GFI, I’ve been thinking about the current situation for a few days…

Although, initially I was inclined to support this proposal, I too believe that the 2nd order effects that @blakewest has articulated could be highly detrimental for the protocol’s long term success. My main concern is the precedent it sets with future borrowers as it may lower their commitment to respect our loan agreements, because hey, a precedent would have been set (and funds allocated) to bail out current and future backers.

On the other hand, it’s terrible that such a loss is occurring at a “relatively” early stage of the protocols maturity and as such future backers may extrapolate the loss rate for future deals - however, it actually would be an accurate finding and also the better the protocol and communities ability to underwrite and support deals the more the loss ratio will correct itself over time.

As much as it would be more financially beneficial to me in the short term to support this proposal, I unfortunately will not be lending my support for this proposal as I do indeed think it is a slippery slope and also believe the $15 mn amount is way too high. I strongly believe in the protocol and believe as a community we should come together and leverage the full might of the law and our agreements with Lend East to recover as much as possible.

I would also be willing to support other proposals such as raising voluntary donations from passionate community / team members to support backers during this time of need - while we will likely not come close to being able to bail out backers through this effort, I certainly would participate and believe it would be a testament to the strength of community and team. We’re in this together and value the long term success of the protocol, but also acknowledge the unfortunate growing pains we face.

1 Like
9

Hi @blakewest @nanojohn @MarkSaunders

Thanks for chipping in.

I think the main point of your reservation around backstopping in some sort is that you don’t want to relieve the lenders from “moral hazard”, which is a fair point, and should play a core role in the system.

However this is not accurate in the case of LendEast and this failure differs from most other pools, because the cause of the loss is not economic but fraudulent and is the consequence of the failure of the infrastructure provider (i.e. Goldfinch/Warbler) first and foremost.

  • As an example, AlmaVest has been sharing that they will be late on their repayment, and communicated as soon as they could (as per the lender agreement). They didn’t fraudulently used the money to pay other borrowers or for any other unauthorized uses. The underlying collection is just delayed, i.e. we are in the situation of an economic moral hazard.
  • In the case of LendEast, the borrower (i) breached its information rights by not communicating for almost a year (ii) used fraudulently at least USD750k for unauthorized uses and the infrastructure in place (i.e. Goldfinch/Warber) was unable to take any action or even spot those failures.

The role of Goldfinch as an infrastructure provider is to make sure borrowers and lenders are playing a fair game. There is economic risk related to default of the underlying loans that lenders are willing to take, but the fact that LendEast refused to play a fair game for more than a year, and Warbler/Goldfinch didn’t do anything during this period despite multiple heads-ups and warnings from the community means that it’s not a matter of “moral hazard” but a matter of infrastructure failure.

In that case, not having Warbler and/or Goldfinch take any sort of responsibility is extremely damaging for the long-term success of the protocol, because it sends the message that the infrastructure (goldfinch, and tomorrow Heron) is broken, and frankly entirely useless (if not even EV-negative)

The fact that LendEast decided to take Goldfinch depositor money to pay other lenders first sends a clear message: as an investor, you’d better off going directly to borrowers than going through Goldfinch because the infrastructure layer provided by Goldfinch destroys value in the process (independently of the more hazard).

For the reasons above, and without taking moral hazard from the equation, Goldfinch and Warbler should show that they are not just an EV-negative intermediary / infrastructure provider, but provides an actual valuable infrastructure to its users. Ideally this is through thoughtful monitoring and early enforcement, but when it’s not, it should be through backstopping.

On a more technical note:

  1. GFI tokenomics clearly stated that GFI in the treasury should be used for coverage of loan default:

“14.8% is allocated to the community’s treasury, which the community can decide to use for purposes such as grants to developers and contributors, adjustments to protocol distribution mechanics, and coverage for potential loan defaults.”

It’s quite absurd to hear Mike saying that in fact using GFI token for its designed purpose is an unexpected thing and a “slippery slope”, given that lenders took this information into account before lending.

  1. @mikesall, you should be aware that backers cannot claim GFI when the pool is late or in default, hence your argument that GFI already covers the extra risk for backers is technically shaky. Besides, it was clearly stated in the tokenomics that those GFI for backers were a form of liquidity mining, and separate from the coverage for loan default, which was designed to come from the treasury bucket

  2. If the GFI liquidity is the sticking point, I am sure backers would be fine claiming GFIs instead of USDC and dealing with the liquidity question. This cannot be the key reason to reject a win-win solution.

2 Likes
10

Hi @blakewest ,

That is a terribly disappointing take on the situation.

First of all it is disingenuous to mention how you “personally, and Warbler Labs as an entity, hold significant exposure to Backer positions” when you are NOT a Backer of Lend East and hence have little at stake in the specific case we are dealing with.

Now maybe that explains the sudden change of heart when compared to how Tugende and Stratos were dealt with in the past. As has been pointed out by other members here, Goldfinch’s balance sheet was much precarious at the time, yet the losses (2x that of Lend East!) were immediately backstopped by Goldfinch and Warbler Labs taking responsibility. It is obvious Lend East lenders would expect similar treatment at a time when the impact on the treasury would be minimal. Because that idea has already been enshrined by Goldfinch, in the tokenomics declaration AND further in practice when dealing with previous default cases.

Hence that comment is a gross distortion of reality:
“Doing a full backstop here has a large second order effect of basically enshrining the idea that Backers and LPs don’t really take risk”
=> @nanojohn 's proposal is doing the exact opposite by trying to clarify the extent to which the treasury can be used to backstop Backer and Senior Pool losses, in a context were the existing precedents, to this date, have been to effectively do that every single time. The proposal does not “create an unsustainable expectation for all future pools”, it instead marks off a pre-defined share of the treasury that can be allocated to present and future defaults, clearly limiting what lenders expectation can and cannot be.

If Goldfinch wants to limit future uses of the treasury to backstop its user’s losses, then take this proposal as your opportunity to clearly set the rules and avoid "this is the last time, we promise” fallouts.

Lastly, it is important to remind that the proposal offers using idle treasury to provide working capital to Backers and eventually the Senior Pool, while a legal action is conducted. As Lend East misbehaviour is established as per the information provided by Goldfinch, this basically corresponds to a loan that would greatly alleviate the consequences of this situation for Backers especially, who are suffering a 100% loss on large sums of money (all individuals are in for 5 to 6 figures), which, believe me, is not fun.
Is it worth it to use idle funds to help early backers of the protocol and preserve its reputation, if these funds are to be eventually recovered at a latter date once the legal process is completed? @mikesall , @blakewest , I wish you’d think so too.

1 Like
11

I appreciate your response, but disagree completely with your statement that it “creates a major moral hazard.” Unfortunately, the team’s repeated statements that Warbler Labs is limited or unable to intervene in recovery has already signaled to borrowers that there are no consequences for committing fraud and using borrowed funds from Goldfinch for whatever they want (paying other lenders, paying themselves, stealing it, etc). Therefore, the moral hazard between borrowers & lenders has already been broken by the Warbler Labs & Goldfinch protocols, which is why I strongly feel that using treasury reserves to support lenders is warranted.

So while FIDU / backers have agreed to take on credit risk, they did not sign up to take on systematic fraud risk across the platform. Since the Tugende fraud behavior came to light, there has yet to be a single $ of principal repayment across the entire platform, even though multiple maturities have come due.

I strongly recommend reviewing in detail @Oustov and @Herve posts, because they describe in much more detail what I am alluding to above. At current rates, we are staring down a 15%+ default rate to senior borrowers in a category that should be way < 10%.

If liquidating GFI tokens is a concern, then I can easily amend my proposal to allow for GFI tokens to be airdropped or available to claim by individual FIDU holders / backers.

2 Likes
12

This is the good point. In fact, I think in terms of alignment of incentives and system design this proposal would maximize the recovery likelihood. The whole idea of this proposal is to transfer the responsibility and the incentive for recovery (i.e. money collected) from individual lenders to Warbler/Goldfinch.

If Warbler/Goldfinch treasury bail out lenders but get for themselves all recovered proceeds, Warbler will have a strong incentive to fight for recovery, because all recovery proceeds would now go to Warbler/Goldfinch treasury. The issue with the current situation is that Warbler (i) has little to no pain in having a borrower default (ii) has no real gain in recovering/collecting further. Hence nothing works in the system because borrowers know they can rekt individual lenders, that they will never get sued, and the only adult in the room with financial and legal means (Warbler) has no money at stake (the worst case for Warbler is a bit of negative PR). So, as a borrower, why repay if you know nobody will really give you proper trouble? Incentives drive results, and here if Warbler/Goldfinch protocol walk away without anything tangible at stake, then we will create a terrible precedent.

By asking Goldfinch/Warbler to pay lenders and take on the receivables, we shift incentives to Warbler so that they have a great opportunity to show how great they are as strong private credit professionals do to portfolio collection AND get $5.9m money if they succeed. And ideally, create some fear on the borrower side.

Frankly this is the only solution to avoid a massive-scale default of all pools as borrowers will otherwise quickly realize they can walk away with not paying, taking advantage of retail. And this is a significantly worse scenario than depleting Protocol and Warbler treasury by 5% and giving a real financial incentive to Warbler team to get the money back.

@mikesall @blakewest please fight the right battles - which should be the monitoring of portfolio, the recovery of lost assets (which I think is possible only with the right incentives), and the credibility of your protocol as a responsible middleman, and not preserving the purity of the idea of investor moral hazard

2 Likes
13

After reflecting on the situation, feedback from community members as well as the Warbler team, I think I’ve evolved my position.

I do believe:

  1. The “moral hazard” highlighted by Blake is a serious long term consideration that shouldn’t be taken lightly
  2. As much as the backers knowingly took on risk and were compensated proportionately, due to the very early stage that the protocol finds itself in, many backers unknowingly took on a lot more systemic risk (given there was not much of a track record of successfully securing loan repayments, very new type of product etc.).
  3. A key driver behind backers participating, has been their passion and belief in the project
  4. Everyone is learning as we progress, even the Warbler team - as can be seen by recent pivot with Heron etc…
  5. Containing the “moral hazard” and empathising with community members are both important

As such, my view on the current proposal is:

  1. Amount of $15 mn is way too high
  2. Limiting the potential “bail out” to the Lend East project is important
  3. I may be inclined to support covering no more than 50% of the Lend East default amounts (ideally from team or treasury GFI allocations)
  4. Not covering the whole default amount is important to ensure it does not detract focus from our legal recourse measures that we should embark on with LendEast

Due to the project being still in its early days, things can get messy. But through it all, valuable lessons are being learnt and important to make decisions from both the head and the heart - many times there’s merit in both and the best solution just might lie somewhere in between (while mitigating unwarranted negative 2nd order effects).

FYI: my position may evolve further - great discussion being had.

14

Hello Mark,

I appreciate you being open-minded to community answers.

Can you explain further your point #4? " Not covering the whole default amount is important to ensure it does not detract focus from our legal recourse measures that we should embark on with LendEast"

I am not sure to understand, because frankly, I don’t see a retail lender with a net worth of $200k that has lost $100k with Goldinch suing Lendeast and incur an additional $50k of legal costs. And I think that is the key design issue with Goldfinch, i.e. borrowers like LendEast know very well they can steal the money and they will be fine because there’s no “institution” that will track them down. LendEast case is really selft-explanatory because they took USD750k from Goldfinch retail lender to repay first other institutional lenders (that were more dangerous from a legal point of view)

So frankly I think that if Warbler/Goldfinch doesn’t take the responsibility, buys out the receivables, and sues LendEast, we are designed to have multiple other defaults. The key point is to show that there is moral hazard for the borrowers and that the adult in the room (Goldfinch/Warbler) will show them they are responsible, hands-on, middlemen. Not acting strong is by far the riskiest 2nd order effect, and given all the negligences that we have seen so far, I am not sure Warbler can perform good recovery without significant skin in the game.

From my point of view, the more Warbler/Goldfinch treasury compensates retail lenders, the more rights they have to sue LendEast directly, and the more proceeds they will get in terms of collections, i.e. the recovery will be maximized because they will have a VERY strong financial incentive to collect (i.e. $5.9m).

I do understand (although I think you’re too conservative) your points #1 and #3 and that you want to minimize the impact of treasury and cap coverage to 50%. Still, ideally, on top of those 50%, we would also like to see Warbler take financial responsibility to have skin in the game during the collection process.

1 Like
15

As a committed member of the Goldfinch community, I wish to express strong support for the proposal that the treasury should allocate resources to support our lenders, especially in light of the unique and unfortunate circumstances surrounding the LendEast pool. Here’s why this situation warrants particular attention and action:

Context of the LendEast Pool Issues

The LendEast pool encountered significant issues that starkly differentiate it from other pools within the Goldfinch Protocol. Key among these issues was the fraud committed, which has severe implications for the trust and reliability perceived in our ecosystem. Furthermore, LendEast has ceased communications, refusing to engage with the community or Warbler Labs despite repeated attempts and mounting concerns from our members. This breakdown in communication is not typical of our experience with other pools and represents a critical failure in operational transparency and accountability.

Why Treasury Support Is Justified

  1. Restoring Trust: In decentralized finance, trust is paramount. The treasury’s intervention in this case is crucial to mitigate the fallout from this fraud, restore confidence among our users, and send a signal to borrowers that Warbler is NOT leaving its retail investors alone and will take action. It signals that while the Goldfinch Protocol encourages autonomy, it also upholds principles of protection and fairness when extraordinary circumstances, such as LendEast fraud, arise.
  2. Playing a fair game: Given that using Goldfinch’s GFI for coverage was a use case laid out in the tokenomics, it would be very unfair to lenders if eventually, the protocol decided to change the rules of the game, all the more when the value of the treasury is above USD80m.
  3. Preserving Protocol Integrity and Encouraging Future Vigilance: By using treasury funds to partially offset the losses incurred by senior lenders and backers, we can prevent this isolated case from unduly influencing the perception and stability of the entire protocol and its little brother, Heron Finance. By stepping in, the treasury not only provides immediate relief but also sets a precedent for handling such impactful events, potentially driving improvements in protocol governance and operational oversight.
  4. Aligning Incentives for Recovery: Transferring the receivables from individual lenders to the protocol and Warbler could streamline and enhance efforts to recover losses. With the protocol itself directly involved, there’s a better alignment of financial incentives to actively pursue recovery, which might be more effective than fragmented individual actions.

Note on Warbler Labs’ Involvement

While this vote focuses on the use of Protocol Treasury funds, it is also worth noting that financial involvement from Warbler Labs would be considered fair, given the oversight issues and multiple instances of negligence that have arisen. Their participation in addressing these losses could further exemplify a commitment to the community and the health of the protocol. Besides, given that Warbler decided to contribute for the Stratos default (and that Stratos was a pool set up, as per Warbler’s team own disclosure, by friends / close relationship), it would be hard to understand that this time they decide to give up and raise questions about the integrity of team (i.e. bailing out their friends but not LendEast)

Given the unique challenges presented by the LendEast pool, I propose a structured approach to go to snapshot

Proposed Votes for Snapshot

  1. Vote on Treasury Support: This initial proposal, structured as a Yes/No, will determine if the Goldfinch treasury should intervene in the LendEast situation. A positive vote here will reflect our community’s commitment to resilience and mutual support in extraordinary circumstances.
  2. Determining the Amount of Support: Following approval, the second vote should specify (i) the exact amount of financial support in USD through a multiple choice question approach (ii) whether this is applicable to LendEast only of whether this should be seen as a guideline for the future. This will take into account the extent of losses and ensure that the allocation is balanced against the treasury’s capacity to support without compromising other protocol functions.
  3. Form of Support – GFI or USDC: The final vote will decide whether the support should be issued in GFI tokens or USDC. If USDC is preferred, this vote will also include decisions on the mechanics of converting GFI to USDC take into account the limited liquidity on DEX (but much better on Coinbase).

Through these well-defined steps, our community can make informed, democratic decisions that reinforce the Goldfinch Protocol’s values and long-term viability. I encourage all members to participate actively in this critical decision-making process. I hope also the team will not hide behind “decentralization” to let retail lenders get rekt while they have pocketed millions of dollars GFI appreciation.

2 Likes
16

Hi Blake,

as one of the first backers, i am utterly disappointed at what is going on in Goldfinch in general, as well as in this thread.

I wont be as nice as others, because honestly, you guys dont deserve nice right now. Going on a high horse and saying we are all in this together is the stupidest thing you could say. Youre not backing LendEast, youve got your hefty GFI allocation, high salary and probably a lot of money not tied up into Goldfinch, while many here likely dont have that. So no, you are not in the same boat with them.

Saying using GFI to make people whole would be a mistake is also funny, since its actually one of the reasons a certain treasury exists (in GFI). You should be less concerned with your holdings (and others) and more concerned how to correct the clusterfuck you guys made here. I am sorry to say, but as an underwriter, and THE ONLY contact of these borrowers you did a VERY poor job handling risk. Not only is this the second company that blindsided you completely, they even allowed themselves to fully breach the contract! I mean in what world does a company like you guys, does such a bad job overseeing these borrowers? Its like they think Goldfinch, Warbler and us are all are joke and they can do whatever they want. Im afraid to even think about a very high possibility that other borrowers will do the same, since they see they can get away with it.

Usually, when someone screws up (hint: you guys screwed up), its on them to fix it, so i would recommend the following:

  1. start acting professional and serious, update and communicate with community (but not in an almost insulting manner like the one above)
  2. start extensively probing and monitoring all borrowers before something like this happens again
  3. chase LendEast on court for all that they have for breaching the contract
  4. find a way to make your community whole (either the above proposal or something else)
  5. all of the above points are detrimental if you guys still want Goldfinch to succeed, because right now you lost all trust and credibility and im pretty sure no one would be willing to send any more money in, ever

So sorry to the community because i know some are having a hard time, and i am super super disappointed at the lack of professionalism from Warbler, both on comms and as an underwriter/someone who should be on top of borrowers all the time.

2 Likes
17

Just chipping in to highlight something i really do find compelling in @Herve 's comments on moral hazard (even when there seem to be some confusion on the use of the term).

@blakewest 's rationals for why we should not bail out lenders is to avoid moral hazard for lenders. But looking at the state of Goldfinch’s current overall portfolio, said moral hazard is effectively on the borrower side instead, and this is much, much more dangerous for the global protocol and FIDU holders.

I completely agree with the fact there is a lack of incentives for Goldfinch to go after Lend East in court. There is a clear case made that Goldfinch should buy out the claims and proceed to sue Lend East and give them max pain, to protect all users including Senior pool lenders, and the credibility of the project as a lending marketplace.

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Thanks Herve,

At the end of the day, the Goldfinch protocol is a decentralised application. Part of removing the “middle man” involves having the community and borrowers transact directly with eachother along the guardrails provided.

I believe fully bailing out backers negates the responsibility each backer has to carefully decide which companies to back and transact directly with them.

Defaults will continue to occur in future and I believe fully bailing out backers sets the wrong precedence for how these issues will be dealt with in future.

I do however support a partial bail out of up to 50%.

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Hi Mark,

I get the point that you have to be careful with negating the responsibility of backers because backer’s role is to perform some form of credit assessment. Still, frankly in this particular case it was impossible to be “responsible” and assess the real credit risk when:

  • the borrower doesn’t answer any of your messages and data requests for a full year (i.e. no disclosure from borrower)
  • the borrower performs fraud (i.e independent of any economic risk) to repay other LP first

Thus what happened was not a lack of credit assessment from backers, but a clear failure of the “guardrails” (i.e. Warbler’s team)

In any case, a staggered vote as proposed by @Antoine should allow you to successfully vote for support, and then decide what % should be the support coming from the protocol treasury.

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One other point is that there are a lot of suggestions that Warbler Labs should step in to repurchase FIDU tokens back from holders to align incentives to maximize recovery efforts for loans currently in default (from fraudulent activity) and potential future defaults.

I would personally be supportive of a voluntary buyback of FIDU shares at a par value of $1.0 for 1 token. This would give Warbler Labs a current 17% discount to NAV and room to potentially absorb $10mm of defaults or failed principal recovery, and still break even. This would give users the opportunity for liquidity at a fair discount.