GRC-02: A Blueprint For Goldfinch

Proposals
1

Authors: @mikesall and @blakewest

Summary

Goldfinch already provides the foundation for a massive market to flourish — private credit totals $1.4 trillion globally — and there is an incredible opportunity to use the benefits of crypto to make this market more open, interoperable, and liquid.

But to do that, we need to unlock far more growth for the protocol. Active loans on Goldfinch have remained stagnant over the past 18 months, and turning that around requires more than incremental updates. It requires a clear and decisive strategy.

In this post, we propose a blueprint to do exactly this. It combines the advantages of the current macroeconomic environment, the latest crypto technologies, and our learnings to date into a strategy we believe can unlock growth and help Goldfinch tackle this massive opportunity.

Step one is for Warbler Labs to build its own successful lending business, a robo-advisor for private credit, on top of the Goldfinch protocol. In doing so, Warbler will be an early example of how to build on the Goldfinch “operating system for lending”, which will lead to…

Step two, where the community focuses on getting many others to build their onchain lending businesses using the Goldfinch operating system, which will lead to…

Step three, where the community can build a broad array of products and services that take advantage of the growing ecosystem of interoperable loans.

Lastly, this all implies some specific changes to the protocol related to fees in order to bootstrap the protocol’s growth. We cover those at the end.

Let’s discuss in more detail.

The Core Insight, and the Need for a Brand

After interviewing many investors about Goldfinch and its offerings, we came away with a core insight: mainstream investors want private credit, but they don’t feel equipped to make private credit investments on their own.

The corollary of this is that they want a trusted brand who they know is always working for them, both before and after an investment. Goldfinch doesn’t have this today. It has a broad community of people that keeps changing over time, and there is no single brand driving or maintaining the senior pool. But mainstream investors want branded credit markets.

If Goldfinch wants to grow, it needs to support businesses and offerings that people want.

As a practical matter as well, it has become clear that trusted intermediaries are needed to help manage and service the loans. This is necessary to manage the relationship with borrowers, in addition to providing confidence for investors that their investments are in good hands.

Taking this learning to heart leads to an important clarification of Goldfinch’s focus, both now and in the long term: Goldfinch needs to support many separate, centralized, branded lending businesses all building on top of one decentralized infrastructure. In effect, Goldfinch should be an “operating system for lending.”

The underlying idea isn’t new. Some analogies are how Shopify does this for e-commerce in Web2, and how Optimism does this for chains in Web3. We believe Goldfinch should do this for lending, and that focusing on this model can help unlock hyper growth for Goldfinch.

It looks like this:

Goldfinch Diagram
Goldfinch Diagram1027×556 60.9 KB

In the short term, it means nailing the operating system for one business — and then the next, and then the next. In the long term, it means creating a shared ecosystem of interoperable loans across many lending businesses.

Each of these lending businesses could play the role of asset originator, asset distributor, or both. In fact, a16z described this kind of decentralization of tokenization protocols in their decentralization framework piece. By having many lending businesses play all of these roles, but still build on the same operating system, it will ultimately create a much more robust, more decentralized ecosystem. Further, each of these businesses will be highly motivated to contribute back to the operating system, strengthening it for everyone.

The Robo-Advisor for Private Credit

Already, anyone can build a credit business on top of Goldfinch. But Warbler Labs is especially well positioned to do so, and we believe we could be one of the first branded businesses to build on the Goldfinch operating system and help kick the tires in the process. As part of that we have an exciting announcement: we are building the first robo-advisor for private credit, and the first onchain robo-advisor of any kind.

In fact, we have already submitted an application to the SEC to register as an “internet advisor” (the official term for robo-advisor). If you’re unfamiliar with “robo-advisors”, they are automated investment managers that continually rebalance your portfolio for you. They exist today for stocks and bonds with products like Wealthfront and Betterment, but there’s never been a robo-advisor for private credit before — and certainly not one onchain.

From a macro economic perspective, this is the right time for a product focused on private credit. Rising rates and a turbulent market are making investors look for alternatives beyond traditional stocks and bonds. People are calling this the “Golden Age of Private Credit”, and yet most individual investors have no idea what private credit even is, much less how it can benefit them. We can fill that gap, offering a direct-to-consumer option that makes it possible for typical investors to finally participate.

Thus our new product will target individual investors, initially focusing on U.S. accredited investors. It will offer automatically diversifying and rebalancing portfolios with private credit strategies custom tailored to investor preferences. We will source and monitor these deals with a separate in-house Warbler Lending credit team. Everything will be fully onchain, enable self-custody, and continually focus on enhancing liquidity thanks to smart portfolio construction and the power of crypto to easily move and trade positions.

Further, if we’re going to compete for everyday investors, that means we must have an experience that rivals web2. We’re well on our way to do that. As some of you may have seen back in August, we released a demo called DeFi For the World that shows how we’re leading the way on DeFi UX, making it user-friendly. This is all part of the robo-advisor strategy.

We’re the right team, at the right time, building the right product. We couldn’t be more excited.

Investing in Bootstrapping Growth

Nothing matters unless others actually use this protocol and the new system it enables. Right now, the protocol interest fees discourage many lending businesses from building on Goldfinch. At Warbler, we analyzed how we could build a profitable business and determined that the current interest fees make it essentially impossible to do so. And while we’re already willing to jump through hoops to make the protocol work, it will be even harder to convince other businesses.

Most lending businesses have tight margins, and they won’t build on Goldfinch unless it offers compelling infrastructure that saves them costs, not adds to them.

So, to encourage many lending businesses to build on Goldfinch, we are suggesting that the community replace the interest fee with an underwriting fee and AUM fee that the lending businesses can control. As part of this, we should also add protocol fee switches, initially set to zero, as a percentage of that underwriting fee and AUM fee. To describe the changes specifically:

  1. New underwriting fee and AUM fee options: Create new underwriting and AUM fee capabilities that the lending business controls, and that accrues to the lending business (not to the protocol treasury).
  2. New fee switches: Create protocol fee switches for both of the underwriting and AUM fees, initially set to zero, that directs a percentage of the lending business’s underwriting or AUM fees to the treasury protocol. This fee would apply to new loans originations from the point it’s turned on or changed. It would not affect existing loans.
  3. Change interest fee: For new pools and loans (not existing ones), change the protocol interest fee from 10% to 0%.

This will allow the community to bootstrap growth. Having the fee switch initially set to zero means that fees from new originations on the protocol will not accrue to the treasury. This is all about investing in the long term growth of the protocol by essentially making it free for lending businesses to build on it. But by adding the fee switch, it allows the community to introduce fees later on after the protocol has established network effects.

Building an Ecosystem of Onchain Lenders

When Warbler builds a lending businesses on the Goldfinch operating system, that is just the first of many. By proving how successful an onchain lending business can be, and after the community has refined the underlying operating system in the process, Goldfinch will have the credibility and maturity to get many other businesses to build on top of it too.

At this point, Goldfinch can really scale, as the community can garner the marketing, origination expertise, and investing verticals of many dozens or hundreds of lending businesses. The community can then continually provide better tools and features to make it easier for even more lending businesses to build on the operating system.

In so doing, that will create a network of many loans across many industries and originators, all of which will be interoperable, using the same canonical Goldfinch standards. This will create network effects that will allow the community to build products on top of these loans, which could span all of these companies. We can’t predict everything the community could come up with, but some ideas could include things like an Aave-like borrow/lend system for the assets, or a foreign exchange rate hedging system, to list a couple.

That is the truly exciting untapped potential of DeFi — when Goldfinch gets many businesses at a global scale building on the same interoperable system for lending, there are countless possibilities in the new products the community could build around it.

The Blueprint, Summarized

All of the above rolls up into a Blueprint for Goldfinch:

  1. Enable a successful lending business → Warbler will be among the first to build on Goldfinch, with a robo advisor for private credit that uses the blockchain to enhance the deals.
  2. Scale to many businesses → The community will support many businesses building on the Goldfinch operating system, which creates a network of interoperable loans
  3. Build an ecosystem of products and services → When Goldfinch has many lending businesses building on the same standardized stack, the community can take advantage of those network effects to create new products and services that support all the loans.

To summarize, we believe there’s a massive opportunity in front of Goldfinch to tackle the $1.4 trillion private credit market. However, to break out of the recent stagnant growth, the Goldfinch community needs a clear and decisive strategy that makes big changes, not incremental ones.

The goal of this blueprint is to use our learnings and advantages in the current market to create a hyper scalable evolution of Goldfinch that gives investors what they want.

Voting

There is a lot in this post, so have split this out into two separate proposals for community vote, linked to below:

3 Likes
2

It’s good to see that Warbler Labs recognizes the need for change to break out of the current stagnation. I support both proposals

3

While I think the current lack of progress is due to the macroeconomic situation and the phase of the cryptocurrency market, change is still necessary. For the development of the protocol, some consistently implemented steps are really needed that can ensure the growth of the protocol. Personally, it is not entirely clear to me what is meant by the Goldfinch operating system, is this the protocol in its current state or will there be any significant changes introduced (besides those indicated in the proposal)?
As for my opinion, I am entirely for this initiative.

4

Appreciate the clarity in outlining an updated strategy here. Enabling a financial platform for various lending business is a compelling approach. Agree that focusing on private credit to become the “operating system for lending” (within private credit) makes sense. As stated in the post, the biggest piece moving ahead will be creating trust around the entirety of the platform, which will have different businesses building on it. How do you QC all of these businesses to build platform trust? Any ideas as to how to build a system that enforces the same thresholds for quality? Some of the things I’m thinking about:

  • For the robo-advisor in step one, how often does private credit need to be re-balanced? Will there be a focus on (very) short-term lending? Will this look like a fintech app with crypto rails underneath, building on the DeFi for the World UX? Also curious how the private credit positions will be represented on-chain.

  • For step two, it seems like the idea is to let individual lenders control their fee, enable growth, and then focus on protocol fees much later post-growth. This clears out an early obstacle (high fees) to joining, but what do you anticipate the other main drivers will be for lending businesses to come build on Goldfinch? Access to investment? What specific measures do you all envision will lower costs for infrastructure? Will socializing costs across many businesses help?

  • On the ecosystem of products and services: this becomes successful if incentives are not required to build on top of Goldfinch – teams build only because it’s a business opportunity and they can make money. Creating an early pipeline to teams doing this on other DeFi protocols could be helpful here long-term.