Deep Dive: TrueFi — Fallen Angel?
Co-written by: Russell, Alden, Samuel Oscar Yobeliano, Kennard Low
Feeling the Pinch: The Rise of Interest Rates
2022 will go down in history as one of the most significant years for the Fed, as central banks hiked interest rates by a cumulative 425 basis points — the highest since 1980. The unfortunate coincidence of war and pandemic had resulted in tremendous inflationary pressure on the global economy, making it the first time since 1994 that the Fed had raised rates by 0.75% at a single meeting. And this happened four consecutive times.
Consequently, firms and businesses have to bear the brunt of heightened borrowing costs. This makes it challenging to secure financing and credit from traditional lenders, leading many of them to explore DeFi as an alternative.
Bringing Lending On-chain
Enter TrueFi — an uncollateralized lending protocol that allows borrowers to maximize capital efficiency while providing full transparency of capital allocation. Transactions on TrueFi are transparent and publicly auditable, enabling lenders to track every dollar (or token) loaned to TrueFi’s borrowers and portfolio managers. The unique smart contracts on TrueFi also give portfolio managers the ability to create instruments such as fixed rate loans, lines of credit, and multi-tranche facilities.
Credit opportunities on TrueFi span strategies across multiple sectors and various liquidity profiles, with borrowers comprising crypto-native institutions, credit funds, as well as FinTech and TradFi firms. Since its launch in November 2020, TrueFi has originated more than $1.7bn in loans to >30 borrowers and paid more than $38m in interest to protocol participants. However, it is now merely a shadow of its former self, which saw its TVL exceed $800M. Does this seemingly fallen angel have a shot at redemption?
Lend, Borrow, Manage
The TrueFi ecosystem consists of lenders, borrowers, and portfolio managers who are seamlessly connected via smart contracts governed by the TRU token.
Earn Yield by Lending
- Source opportunities via app.truefi.io or by contacting portfolio manager directly
2. Onboard / KYC (if necessary)
- Permissioned pools on TrueFi may require identity verification / KYC from lenders.
- For more on KYC: Read here
3. Lend funds with instant settlement, 24/7
- Approve and deposit to receive LP tokens
4. Monitor activity & track returns
5. Redeem / Withdraw funds
Borrowing Process
With uncollateralized loans, TrueFi serves as a viable avenue for companies to raise capital. The only requirements imposed by TrueFi is that the borrower must 1) be a business entity and 2) have a minimum of $10M Assets Under Management (AUM). Once the borrowers have passed these requirements, they are able to enjoy the various benefits of borrowing at TrueFi such as :
1. No Collateral Lockup
This gives the borrower more financial flexibility and advantage in raising capital with the most competitive rates in DeFi.
2. Privacy Preserving
Options for anonymized borrower applications, utilizing upcoming technology of zero-knowledge proof support.
3. Credit History
Develop your borrower profile & repayment history to benefit from the most favorable loan terms on TrueFi and beyond.
Borrowers would need to follow a simple 3-step process for them to get their first loan in as fast as 7 days.
Step 1 : Borrowers need to complete KYC/AML, financial review and sign a master loan agreement
Step 2 : Community will need to approve your borrower application and grant borrower access to Borrower’s Dashboard on TrueFi app.
Step 3 : Once approved, borrowers can now request a loan on-chain, receive funding and repay their loan in the dashboard at the end of the term
Funds are SAFU: Events of Default
As with any other lending protocol, the probability of borrower defaults exists on TrueFi.
A default refers to the event where a borrower fails to repay the principal debt and interest on the stipulated date. The Portfolio Manager is responsible for designating a loan as “defaulted,” and only they have the authority to do so.
In the event of a default, a Secure Asset Fund for Users (“SAFU”) smart contract will be activated, affecting both stakers and lenders.
Up to 10% of TRU (its Maximum Liquidation Rate) will be slashed from the staking pool and transferred to the SAFU to cover the “Defaulted amount” — equal to the principal amount plus the full amount of expected interest.
TrueFi lending pools will then transfer all bad debt assets (defaulted LoanTokens) to the SAFU in exchange for the full expected value of those assets. If the SAFU funds are insufficient to cover the defaulted loan; the SAFU can sell TRU for the respective borrowed asset at its manager’s discretion.
If the value of the SAFU funds can not satisfy the defaulted loan:
- The difference between the defaulted loan and the SAFU is calculated (“Uncovered Amount”).
- The SAFU will issue ERC-20 tokens representing a claim for the Uncovered Amount (“Deficiency Claim”).
- Then, the affected lending pool will receive a Deficiency Claim for the Uncovered Amount, assuming its successful recovery.
- The affected lending pool will have a first-priority claim on the funds recouped through arbitration for the Deficiency Claim amount.
If a debt is repaid:
- The recouped funds will be used to purchase the asset that the Loan Token was originally denominated in, which will be transferred to the LoanToken contract.
- The SAFU will burn the Loan Tokens for the underlying value of those tokens (“Recovered Amount”)
- The SAFU is going to repurchase the issued Deficiency Claim tokens from the lending pool up to the Recovered Amount.
- If there is a remainder of the recovered funds after repurchasing the lending pool’s Deficiency Claim, the SAFU keeps those funds.
If any portion of the original loan amount is not repaid after the completion of the legal recovery process; the lending pool’s remaining Deficiency Claim tokens are going to be burned, reducing the LP token price.
You can read more about the SAFU here.
Staked TRU
TRU holders can stake TRU and receive stTRU tokens in return, receiving a share of protocol fees. The percentage of fees distributed to stakers can be modified through protocol governance. Whenever a pool generates protocol fees, they are converted into tfUSDC tokens, which are then distributed as rewards to stakers.
At the time of writing, the annual staking ROI sits at 21.83% with a Total Value Locked (TVL) of USD13.29M in stTRU.
TRU stakers can also participate in the Loan Approval Process for TrueFi DAO pools, allowing them to vote to approve/reject loans. However, stakers risk losing their staked TRU tokens in the event of loan defaults, where a portion of staked TRU is liquidated and transferred to the lending pool to repay lenders (as aforementioned).
Once staked, TRU will be locked into the protocol and a cooldown period will need to be initiated before the tokens can be unstaked or withdrawn. After the cooldown period, there will be a short duration to unstake or withdraw the staked tokens. If not unstaked within this window, they will be re-staked into the protocol and stakers would have to wait for another cooldown period before being able to unstake.
Loan Approval Process
To participate in the Loan Approval Process, you need:
1. Hold stTRU tokens
2. View loan applications on the Stake page
3. Vote YES or NO
YES — the loan will likely not default, NO — the loan will likely default. It is worth noting that stTRU is not locked up when voting and stakers can use their entire stTRU balance on multiple votes.
stTRU holders can start voting from the moment the loan application goes live, until it is funded or cancelled. The loan application can only be funded by the lending pool after a minimum voting period has passed, and this period is set in the smart contract of the loan. If the loan has not been funded or cancelled yet, stTRU holders can modify or retract their votes anytime.
Loan applications are approved when two criteria are met:
1. ≥ 15mil votes
2. 80% YES-to-NO vote ratio
After the loan is approved and withdrawn by the borrower, the loan becomes active. stTRU holders who voted on the loan will be compensated TRU tokens which are distributed to voters based on their share of the total votes received.
Tokenomics
As of writing, TrueFi has a TVL of USD25.8M which includes all assets in lending pools as well as staked tokens.
TRU is priced at 0.09USD with a market cap of USD73M and a circulating supply of 978M TRU and a maximum supply of 1.45B TRU.
Risks
TrueFi’s involvement as a credit facility in the FTX saga has gained itself a bad name that’s associated with the collapse of a giant player. Although Alameda Research’s USD7.3M write down is part of the costs of doing business, it sure is a heavy and painful one, given how it also rocked the confidence of all investors in such protocols.
Moving forward, a plausible risk is the complete eradication of unsecured or under-collateralised lending protocols like TrueFi. As of now, Aave and Maker are the 2 largest lending protocols, with TVLs that far exceed those behind them. However, we strongly believe this is attributed to the fear towards lending after the successive collapses of FTX, 3AC and Celcius Network that left investors with pennies on their (hundreds of) dollars. Get this: crypto is still a relatively nascent space, which translates to tremendous growth potential. Many start-ups who will enter the space may not have the pre-requisite capital to meet conventional loan requirements set out by secured loan protocols, which is where TrueFi comes in. When sentiment picks up and risk appetite increases, TrueFi’s importance will too.
Conclusion
Nevertheless, TrueFi is a promising and viable platform for small firms and SMEs seeking financing and credit through DeFi, especially in times of rising interest rates. With uncollateralized borrowing, firms can easily secure loans without even having to post any collateral. Lenders, on the other hand, can generate returns on their loaned assets by lending to trustworthy borrowers vetted by the team, as well as TRU stakers. Its governance structure allows for community input and decision-making, incentivising stakers to exercise due diligence in approving loans by conducting rigorous background checks to prevent bad actors. TrueFi’s lending model is also more transparent and secure than traditional lending, allowing lenders to track how their funds are allocated.
Due to the inherent risk of borrower defaults, TrueFi has implemented various mechanisms in the SAFU contract to mitigate the impact of these events. While TrueFi is still centralised to some extent, the protocol does not compromise on transparency, security, and overall functionality, minimising risk for its protocol participants.
TrueFi is a great avenue for both borrowers and lenders looking to benefit from the opportunities provided by the DeFi space. It essentially serves as a conduit for companies to take on leverage in this growing space, in turn providing more liquidity in the market.
