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Goldfinch V1 Documentation
Goldfinch V1 Documentation
  • Introduction
  • Goldfinch Overview
  • Protocol Mechanics
    • Glossary of key terms
    • Borrowers
    • Auditors
    • Backers
    • Liquidity Providers
    • Leverage Model
    • Membership
    • Investor Incentives
      • Backer Incentives
      • Senior Pool Liquidity Mining
    • Unique Entity Check
    • Discussion of Fraud Resistance
    • Staking
    • GFI Token
    • Liquidity & LP Withdrawals
    • Default Process
  • Governance
  • Tokenomics
    • Token Launch FAQ
  • Unique Identity (UID)
    • For Users
    • For Developers
    • Unique ID FAQ
  • Borrower Communication
  • Investor How-To
    • Getting Started on Goldfinch
    • Verifying Your Identity
    • Participating in Callable Deals
    • Participating in the Senior Pool
    • Participating in Borrower Pools
    • Participating in Liquidity Mining
    • Claiming GFI Distributions
    • Accessing Borrower Communication Channels
    • Purchasing coverage with Nexus Mutual
  • Borrower Mechanics
    • Raising Capital through Goldfinch
    • Goldfinch's Capital Providers
      • Sample Backer Economics
    • Goldfinch's Borrowers
      • Template Borrower Deal Structures
      • Borrower Case Study
    • Structure and Legal Considerations
      • Cash in and out of Goldfinch
        • Recommended Service Providers
      • Investor KYC / AML Requirements
      • Key Mechanics to Consider
        • Debt Facility Mechanics
        • Transaction Documentation
      • Borrower Senior Pool Participation
      • Backer Transferability
  • Borrower How-To
    • Launching a Borrower Pool on Goldfinch
      • Stage 0: Preliminary Actions and Decisions
      • Stage 1: Deal Structure and Timelines
      • Stage 2: Dataroom Preparation
      • Stage 3: Announcements and Tooling Set Up
      • Stage 4: Borrower Closing
  • General FAQ
  • 🔗Important links
    • Governance Portal
    • Developer Docs
    • Protocol Data Dashboard
    • Borrower Impact Data
    • November 2021 Audit
    • Immunefi Bug Bounty
    • Github
  • 🔗Connect
    • Discord
    • Twitter
    • Medium
    • Weekly Updates
    • Backer Launch Updates
    • Telegram
    • Youtube
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  • Fraudulent Borrower, honest Backers
  • Borrower collusion with Backers
  • Borrower collusion with Auditors
  • Fraudulent Backers, honest Borrowers

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  1. Protocol Mechanics

Discussion of Fraud Resistance

Because the protocol does not require crypto overcollateralization, new potential vectors for fraud are possible. It is worth discussing each one in depth, and how the protocol builds resistance against it. Please note that these scenarios focus on malicious or dishonest activity, not poor performance of well-intentioned borrowing.

Fraudulent Borrower, honest Backers

A fraudulent Borrower could first attempt to fool both Auditors and Backers into thinking they are legitimate, and then borrow capital without repaying it.

The first guard against this are the Auditors, who must approve Borrowers before borrowing. Because Auditors are randomly selected, it is difficult to collude with them.

The second guard are the Backers, who are highly incentivized to analyze their investment choices closely as they supply higher-risk junior capital—meaning they will be the last to be repaid if a Borrower was to default. It is likely that Backers will want to do extra research on Borrowers and potentially communicate with them directly.

Lastly, Backers may sign off-chain legal contracts with Borrowers, which opens Borrowers to legal recourse. Currently all loans on Goldfinch are fully collateralized with off-chain assets and legal contracts.

Borrower collusion with Backers

A Borrower could collude with people they know to act as Backers and supply to their Borrower Pool. This would artificially increase the leverage ratio and fool the Senior Pool into allocating additional capital.

The first guard against this are the Auditors, who must approve Borrowers before they are able to borrow. Because Auditors are randomly selected, it is difficult to collude with them.

The second guard is that it requires many individually verified Backers to supply significant amounts of upfront capital in order for the Senior Pool to provide leverage, which makes such collusion with Backers difficult and expensive.

Lastly, the Unique Entity Check adds Sybil Resistance by making it difficult to programmatically create fake Backers.

Borrower collusion with Auditors

A Borrower could collude with Auditors to obtain approval for creating Borrower Pools when the Borrower is in fact not legitimate.

The first guard against this is that the requirement of a Unique Entity Check prevents a Sybil Attack, where fake Auditors are programmatically created to overwhelm the system. Instead, each Auditor must be a verified entity.

The second guard is that Auditors must stake GFI in order to participate, which is slashed if they vote differently than the majority of Auditors. This incentivizes Auditors to act honestly in order to preserve their stake.

The third guard is that Auditors are randomly selected, weighted by their staked GFI, so it would require staking a significant amount of upfront capital to be chosen frequently enough to skew the votes.

The fourth guard is that anyone can request an approval at any time, so it would require colluding for all potential future votes rather than just one.

Lastly, even if a fraudulent borrower successfully colludes with Auditors, they must also convince many Backers to risk their own capital by depositing to the Pool.

Fraudulent Backers, honest Borrowers

An individual or group of Backers might supply to a particular Borrower Pool even when they don’t view it as a good risk. This would artificially increase the leverage ratio and fool the Senior Pool into allocating additional capital, boosting the Backers' returns.

The first guard against this is that the Unique Entity Check requires each Backer to be verified, preventing a Sybil Attack of programmatically-created Backers and instead requiring the coordination of many people to achieve Backer collusion.

The second guard against this is that it requires the Backers to take real risk by supplying first-loss capital. The Backers only achieve higher returns if the Borrower does in fact pay back what they borrow, in which case it is beneficial to all participants in the protocol, including the Senior Pool.

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Last updated 2 years ago

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