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Backers
Backers evaluate Borrowers and supply first-loss capital on their Borrower Pools. Backers can achieve higher returns when the Senior Pool leverages them with additional senior tranche capital. Currently, Backer rewards and Backer staking are not yet live, but it is expected that the community will introduce and vote on a proposal for these in the coming months.

Supplying to Borrower Pools

Backers look at Borrower Pools as investment opportunities. They evaluate the information Borrowers provide and decide if they want to supply capital to the junior tranche of a Borrower Pool.
The Senior Pool provides additional senior tranche capital to the Borrower Pool according to the Leverage Model. To account for the lower risk of the senior tranche, 20% of the senior tranche’s nominal interest is reallocated to the junior tranche. In addition, the protocol retains 10% of all interest payments as reserves, which are managed by the decentralized Governance.
As a result, the Senior Pool earns an effective interest rate equal to 70% of the nominal interest rate. Or, in terms of the nominal interest rate,
ini_{n}
, protocol reserve allocation,
pp
, and junior reallocation percent,
jj
:
isenior=in(1pj)i_{senior}=i_n*(1-p-j)
Accordingly, based on these same inputs and the leverage ratio,
rr
, Backers receive an effective interest rate of:
ijunior=in(1p+rj)i_{junior}=i_n*(1-p+r*j)
For example: Consider a Borrower Pool with a 15% interest rate and 4.0X leverage ratio. If the Backers supply $200K, the Senior Pool will allocate another $800K. Assuming the Borrower borrows the full $1M for one year, they will pay $1M * 15% = $150K in interest. Of that, the Senior Pool receives 0.15*(1 - 0.1 - 0.2) = 10.5% interest, or $800K * 0.105 = $84K. The Backers receive 0.15*(1 - 0.1 + 4*0.2) = 25.5% interest, or $200K * 0.255 = $51K. The remaining $15K is the 10% protocol reserve allocation.

Early Backer Rewards

It is easier to feel confident supplying to a Borrower Pool when a lot of other Backers are already supplying to it and the Senior Pool is already adding leverage. It is riskier to be the first one in a Borrower Pool. To incentivize Backers to supply early on, the protocol provides an additional GFI reward to all Backers who contribute early on, with the reward amount decreasing for later Backers as the Borrower Pool reaches its limit.
The protocol assigns the reward when a Backer supplies, but the reward is not immediately claimable. The percent of the reward that is claimable is proportional to the percentage of the full expected repayment of principal plus interest that the Borrower successfully repays. This ensures the Backer only receives the early Backer reward after the Borrower Pool proves valuable to the protocol.

Staking on Backers

In addition to evaluating individual Borrower Pools, Backers may also evaluate other Backers in order to give them leverage. Backers can do this by staking GFI directly on another Backer.
Based on the amount of GFI staked on a given Backer, the Senior Pool uses the Leverage Model to calculate a leverage ratio and allocate capital whenever that Backer supplies to Borrower Pools. For example, if a Backer has a leverage ratio of 4.0X based on who has staked GFI on them, then anytime they supply to a Borrower Pool, the Senior Pool will allocate 4.0X of that amount.
The Senior Pool provides this leverage up to a maximum total that is calculated as the leverage ratio multiplied by the total value of GFI staked on that Backer. For example, if the Backer has $1M worth of GFI staked on them with a 4.0X leverage ratio, the Senior Pool will allocate up to $4M total leverage.
When GFI is staked on a Backer, that GFI serves as collateral against potential defaults for that Backer’s positions in Borrower Pools. When a Borrower defaults, the GFI staked on all the Backers in that pool are reallocated to the senior tranche until the senior tranche is made whole on their expected payments. This incentives Backers to stake on other Backers who supply to safe Borrower Pools.
To reward Backers for staking GFI on other Backers, the protocol distributes GFI to them on a regular basis. The protocol allocates the distributions in proportion to the interest their leveraged GFI earns. This incentivizes Backers to stake on other Backers who supply to high-yielding Borrower Pools.

Summary of Backer Incentives

Backers have an incentive to provide first-loss capital to Borrower Pools because they can receive both early Backer rewards and higher effective yields based on the Senior Pool leverage. They also have an incentive to stake GFI on other Backers because they can earn additional rewards when that Backer supplies to Borrower Pools