Let's take the below deal terms as an example of how back-leverage works:

Hypothetical Transaction:

• Facility Size - $5,000,000

• Borrower Coupon - 12%

  • Senior Net Coupon = % Gross Coupon - 20% Junior Relocation - 10% Pool Reserve

  • Junior Net Coupon = % Gross Coupon + 20% Junior Relocation - 10% Pool Reserve

• Leverage Ratio - 4x

• Backer Investment: $1,000,000

• Senior Pool Investment: $4,000,000

Senior Pool Economics: 8.4%

Backer Economics: 20.4%

The table below shows the economics for both the Backers and the Senior Pool for a Borrower Pool with details above. You can download this sheet here.

There are two types of capital providers on the Goldfinch protocol. They are:

• Liquidity Providers who supply capital into the Senior Pool, and

• Backers who supply capital into individual Borrower Pools.

You can learn more about these roles in the Protocol Mechanics sections of the documentation.

At a high level:

• The Senior Pool is a ‘blind pool’ of second-loss capital that is diversified across Borrower Pools on the Goldfinch protocol. This means that Liquidity Providers (LPs) who provide capital into the Senior Pool are capital providers in search of diversified exposure across all Borrowers, and do not want to take on individual Borrower risk.

• In contrast to LPs, Backers are active capital providers. They carry out in-depth due diligence on individual Borrowers, and ultimately ‘Back’ these Borrowers by investing first-loss USDC in the Borrower’s Pool. The more Backers who ‘Back’ the pool, the more trustworthy the protocol believes the Borrower to be.