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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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  • Trust Through Consensus
  • Leverage Model Formula

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  1. Protocol Mechanics

Leverage Model

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Last updated 2 years ago

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The Leverage Model determines how much capital the Senior Pool allocates toward each Borrower Pool, based on how much it trusts each Borrower Pool. Currently, the automated Leverage Model as described here is not yet live, but it was included in the community-approved roadmap for near-term development linked .

Trust Through Consensus

In order to determine how to allocate capital from the Senior Pool, the protocol uses the novel principle of "trust through consensus." This means that while the protocol doesn't trust any individual Backer or Auditor, it does trust the collective actions of many of them. At a high level: when more Backers supply capital to a given Borrower Pool, the Senior Pool increases the ratio with which it adds leverage.

Because this approach relies on counting individual Backers, the protocol must ensure they are in fact represented by different people. Therefore, all Backers, Borrowers, and Auditors require a unique entity check to participate (see the ).

Leverage Model Formula

The leverage amount, AAA, that the Senior Pool allocates is determined by the formula, A=S∗D∗LA = S * D * LA=S∗D∗Lwhere:

  • SSS is the total capital supplied by Backers.

  • DDD is the distribution adjustment on a scale of 000 to 111, which accounts for how evenly distributed the Backers are. DDD is closer to 000 when the distribution is skewed and closer to 111 when the Backers are more equally distributed. This ensures no single Backer has an outsized influence. The formula for DDD uses the percent supplied by each Backer, sns_{n}sn​ , and is based on the Herfindahl-Hirschman Index:

D=1−∑i=1nsn2D = 1-\sum_{i=1}^n s_n^2D=1−i=1∑n​sn2​
  • L is the leverage ratio on a scale of 000 to the maximum potential leverage ratio. Based on the number of Backers, bbb, the leverage ratio increases linearly from BminB_{min}Bmin​ , the minimum number of Backers necessary for leverage, to BmaxB_{max}Bmax​ , the maximum number of Backers necessary to achieve the maximum potential leverage, LmaxL_{max}Lmax​:

L=Lmax∗max(0,b−Bmin)Bmax−BminL=L_{max}*\frac{max(0, b-B_{min})}{B_{max}-B_{min}}L=Lmax​∗Bmax​−Bmin​max(0,b−Bmin​)​
here
Unique Entity Check section