Introducing TrueFi, the DeFi Protocol for Uncollateralized Lending
Meet DeFi’s leading protocol dedicated to collateral-free loans, powered by the world’s first on-chain credit scores
TrustToken has launched TrueFi, the protocol for uncollateralized lending, powered by the first ever on-chain credit scores and governed by holders of the TRU token.
At launch on November 21st, 2020, TrueFi provided for (a) vetted borrowers to request loans denominated in TrueUSD (“TUSD”), (b) TRU Stakers to assess the creditworthiness of loans, (c) and TrueUSD lenders to earn attractive APY & TRU incentives on stablecoins loaned on the protocol.
Since that launch, TrueFi has evolved rapidly following a public roadmap, undergone two major protocol upgrades, started decentralizing protocol governance via Snapshot, and exceeded $200 million in loan originations with zero defaults — making TrueFi DeFi’s first and leading uncollateralized lending protocol.
This litepaper was updated July 2021 to include these milestones & reflect changes in the design of the protocol.
While much of DeFi’s success has been built on overcollateralized lending, uncollateralized lending and bringing true credit scoring to crypto is widely seen as the next transformative step for DeFi. The traditional unsecured lending market makes up a $11 trillion global industry — yet none of that lending had come on-chain until TrueFi completed DeFi’s first uncollateralized loan in 2020.
Because uncollateralized lending provides an opportunity for lenders to earn higher long-term returns than secured lending, and for borrowers to maximize their capital efficiency, we believe on-chain, collateral-free lending will ultimately far outpace DeFi’s existing collateralized lending market.
🧠 Learn More: Read on to learn about how we got here, the present and future of TrueFi, and how to start lending on the protocol to earn TRU. For a summary, watch a video walkthrough of TrueFi here.
💰 Use TrueFi: Start lending, voting, and staking on the TrueFi app now. Watch out how-to guides for each major protocol activity on YouTube.
🤝 TrueFi Community: Discuss TrueFi & TRU by joining our Discord or Telegram. Get the latest news on Twitter by following @TrustToken.
📈 Trade TRU: Buy the native TRU token on centralized exchanges like FTX or Binance, or on DEXs like Uniswap and Sushiswap.
💻 Review the Technology: View the technical spec, which has undergone three distinct audits — by Slowmist, ETHworks, and CertiK.
History: Why We’re Building TrueFi
At TrustToken’s inception in 2017, our team envisioned a future in which traditional assets would move to the blockchain, taking advantage of the speed, cost savings, and global nature of decentralized protocols.
The thesis has played out in part: while global stablecoins (like TUSD), commodities, and some financial assets are increasingly moving on-chain, most real-world assets like real estate have struggled to find the infrastructure and demand necessary for a robust marketplace.
The explosion of DeFi introduced a new asset class with huge demand on the blockchain: debt.
As lending and borrowing grew at a breakneck pace, our work as a stablecoin provider gave us a front row seat watching DeFi yields rise and fall. From supporting Bitcoin miners with stablecoins, to providing leverage to trading desks, to the rise of yield farming, we watched centralized and decentralized lending platforms alike compete to find or build new ways of earning high, usually fleeting, yields — most prominently on USD-pegged stablecoins.
TrustToken Enters Uncollateralized Lending
We looked to traditional financial markets for a vehicle that yields high returns, at consistent and predictable rates with manageable risk profiles and landed on uncollateralized lending. Moving the uncollateralized lending market onto the blockchain opens up access to lenders of nearly any size and background, while also providing borrowers with the best possible capital efficiency.
After years of building in crypto, we’ve found the most interesting products act as bridges between traditional and decentralized finance. The TrustToken team has developed some unique strengths by developing and operating five top fiat-backed stablecoins serving over 100 countries, and with TrueFi, we’re bringing these to DeFi:
- A legal framework for enforcing action against delinquent loans compatible with DeFi, even without collateral;
- A longstanding, trusted reputation with retail and institutional users alike to bootstrap a base of high-quality borrowers and lenders, many who are TUSD users with a proven track record as borrowers and lenders; and
- Global fiat-backed stablecoins that act as an easy on-ramp to TrueFi and beyond.
Product: What TrueFi Is and How it Works
We’re proud to introduce TrueFi, a protocol for uncollateralized lending powered by the first on-chain credit scores, and TRU, the native token used for staking and governance.
The goal of TrueFi is to bring uncollateralized lending to DeFi. This helps cryptocurrency lenders enjoy attractive, sustainable rates of return, while giving cryptocurrency borrowers predictable loans that maximize their working capital.
Importantly, all lending and borrowing activity on TrueFi is fully transparent, allowing lenders to fully understand participating borrowers and flows of funds when engaging with TrueFi.
How TrueFi Functions Today
- Lenders add assets into a TrueFi lending pool to be used to fund new loans, for which lenders earn interest and TRU. Any unused capital is sent into the Curve.fi protocol to maximize earnings.
- Borrowers (currently reserved to institutions, rather than retail borrowers) are whitelisted through a rigorous onboarding process that involves a deep review of their business, the signing of an enforceable lending agreement, and TRU community‘s approval.
- Borrowers, once approved, submit a request for capital at an interest rate and credit limit determined by their credit score, which is subject to further TRU community approval, who signal their opinion on the loan by voting “Yes” or “No” on each loan. TRU stakers are incentivized to vote on new loans carefully, as their staked TRU may be liquidated (at a maximum rate of 10% of staked TRU) to protect lenders in case of default.
- The Borrower must return the principal and interest on or before the term expires. Delinquent borrowers will face legal action pursuant to the loan agreement signed during onboarding. Learn more about defaults here.
With the launch of the TrueFi forum & Snapshot voting, TRU holders are also able to direct the future development of the TrueFi platform, including voting to change the mechanics described above.
Start using TrueFi today & join the Discord discussion
Progressive Decentralization & Our Commitment to a Fair Marketplace
TrueFi will be built on the concept of progressive decentralization. Initially, TrueFi development will focus on bootstrapping the protocol and distributing TRU to the community of users and developers who participate in the protocol.
In the long term, TrueFi aims to become a market-driven, automated credit rating and lending protocol. This will demand building beyond the rigid, conservative constraints such as minimum/maximum APY and high TRU participation factor. It will also require increased levels of responsibility from users, especially for onboarding new borrowers beyond the pre-approved whitelist and approving new loan types.
Progressive decentralization will be accomplished in part through the distribution of TRU which is used to stake on individual loans at launch, and could be used to affect major decisions across TrueFi, such as onboarding of new borrowers, once these features are further developed.
Following a plan for progressive decentralization, 39% of TRU has been allocated to an incentive pool for platform participants including Lenders, TRU Stakers, and Liquidity Providers to gradually put TrueFi under the control of its users.
Review the TrueFi token economics in depth in the post below:
In the interim, our Company will make the following three commitments in order to cultivate the fairest marketplace possible:
- Reinvesting Farmed TRU: For at least the first 6 months after launch, all TRU farmed by the Company will be either burned or sent back to TrueFi’s yield farming program to pass on to the community. Track TRU burns here.
- Fixed Supply: While TrueFi is being progressively decentralized, we commit to taking no mint actions that would increase the total supply of TRU (e.g. re-minting burned TRU).
- Fees Benefit Users: The TrueFi protocol takes only one fee: 10% of interest generated by the protocol’s lending activity, paid out to TRU stakers, who also decide on new borrowers to be whitelisted on the protocol.
Risks of TrueFi & Uncollateralized Lending
While borrowers are usually willing to pay higher rates for uncollateralized loans, these higher yields do not come without risks. Compared with collateralized lending, uncollateralized lending has two major risks:
- Potentially increased risk of loss: Protocols that require collateral are protected by that collateral in case of default. While this allows such platforms to be indiscriminate in approving loans, uncollateralized loans come with a much higher standard of trust that must be met by a borrower. In case of default on an uncollateralized loan, a delinquent borrower will have been assessed for creditworthiness before the loan was made and will face both reputational damage and legal action. If such legal action is unsuccessful in collecting on the loan, lenders may lose a portion or the full value of the loan. Learn more about TrueFi’s default process here.
- Liquidity: While lenders on V1 of TrueFi sometimes faced slippage on attempting to exit their positions in the lending pools, V2 introduced Liquid Exit to create a fast, easy, and low-cost way of instantly withdrawing from all Lending Pools. This was accomplished by allowing the Lending Pool to rebuy the lenders’ loan tokens with the pool’s unused capital. Alongside continued support for Uniswap pools of TrueFi lending pool tokens (tfUSDC, tfUSDT, and tfTUSD), lenders can now enjoy the freedom to exit their TrueFi positions at any time and at the lowest possible cost.
July 2021 Edit: Though the risk of loss remains a valid consideration in uncollateralized lending, TrueFi is making progress on reducing these risks:
Risk of Loss: While no investment is free of risk, TrueFi continues to grow the pool of capital used to protect the assets loaned to the platform, across two tranches of protection:
1. Staked TRU (“stkTRU”), which as of writing offers +$3m of default protection to lenders (up to 10% of all stkTRU can be liquidated in case of default)
2. The launch of the Backstop (AKA “SAFU”) Fund in TrueFi V4, which will provide a dedicated layer of assurance against losses to default, funded partly by the Company and partly by TrueFi protocol fees.
Users: Who Benefits from TrueFi
💰 Lenders add assets (such as USDC, USDT, or TUSD) to the TrueFi Pool for use in uncollateralized loans to approved Borrowers. They earn a high yield on capital they loan with the protocol, in the form of loan interest and TRU incentives.
Lenders whose capital is loaned out on TrueFi will receive a tradable ERC20 Pool Token (the “tfTokens”) representing their claim to the principal and interest due on repayment of all loans to the Loan Pool. These tokens can have their own liquidity on Uniswap and other DEXs. In the future, we expect multiple TrueFi Pools may exist simultaneously, possibly with specific lending strategies, like lending just to exchanges.
Lenders have full transparency into how the loaned assets flows through TrueFi to Borrowers, which eliminates the informational disparity found among more opaque, centralized lenders.
Lenders who add assets to TrueFi Farm Pools earn TRU, in addition to the interest paid by Borrowers.
🤲 Borrowers borrow capital from the various TrueFi Pools by completing a rigorous creditworthiness check, gaining whitelisting approval from TRU stakers, and requesting a loan whose terms are set based on the Borrower’s credit score. Borrowers must pay back the loan amount and interest before the loan expires or face both reputational and legal risk, per the terms agreed to in their loan agreement.
At first, TrueFi’s Borrowers will be made up of a whitelist of carefully selected funds vetted by the Company. Over time, TrueFi may open up to any Borrower with an Ethereum address, including other DeFi smart contracts.
📨 TRU Stakers protect Lenders against default, direct the development of the TrueFi protocol through on-chain governance, and vote to approve new Borrowers and loans. By staking TRU, they enjoy a share of the interest from loans generated on the platform, as well as TRU incentives.
🌊 Off-Platform Liquidity Providers support TRU liquidity on Uniswap or Sushiswap, getting the opportunity to farm TRU by staking their LP tokens with TrueFi.
👨🌾 How to Farm TRU Today
As a summary of the stakeholders above, there are currently two ways to farm TRU:
- Earn TRU as a Lender using USDC, USDT or TUSD at TrueFi.io. You can mint TUSD here. Learn how to lend on TrueFi here and how to farm here.
- Earn TRU as a TRU Staker using TRU (purchased or earned) on TrueFi.io. Learn how to stake TRU here.
Since launch, the TRU incentive distribution has been a major topic of discussion. Led by input from the TrueFi community on Discord and the TrueFi forum, the earning rates are being adjusted for the benefit of the protocol and TRU holders — and may be adjusted further.
Everyone is invited to participate in the discussion and TRU holders are invited to vote directly on new proposals and requests for input on the forum.
Technical Contributions: Three Novel DeFi Building Blocks
TrueFi is composed of three distinct components. Each is built to be used by other developers, even if they aren’t using the overall TrueFi system. Developers can plug in at any level of this stack.
LoanTokens: On-Chain Loans with Fixed Size, Term, and Interest Rate
The LoanToken protocol is a minimal system for fixed-size, fixed-term, fixed-interest rate loans on the blockchain. In the future, we expect to see other fund-like DeFi protocols that invest directly in LoanTokens from the top borrowers on the platform. An institutional borrower might create a loan token to raise a $5mm tranche, and any Ethereum wallet or smart contract could contribute as little as $1.
On-Chain Credit Model: Scoring Creditworthiness in DeFi
Bridging real-world and on-chain data to produce a dynamic, reliable gauge of a borrower’s creditworthiness is one of DeFi’s greatest opportunities. TrueFi’s credit scoring model, while still under development today, takes into account a borrower’s corporate background, repayment history, operating and trading history, assets under management, and credit metrics like leverage and risk exposure. This score, displayed publicly on borrower profiles (example: Wintermute) and combined with a community-approved rate model, sets the terms of loans coming through TrueFi today. In the future, not only will the model become ever more sophisticated, but it may be integrated across both the DeFi and traditional financial sector.
TrueFi Pools: Framework for Open-Ended “Funds” with Various Strategies & Risk Tolerance Levels
TrueFi Pools are the top of the TrueFi tech stack, and they’re what users interact with. TrueFi Pools invest in LoanTokens that meet the target credit level per the pool’s risk tolerance. While TrueFi started with a single pool, TrueFi Pools will in the future support a variety of pools with different investment strategies and risk appetites.
Go deeper on TrueFi: Review the technical specifications
Proposed Roadmap: The Future of TrueFi
TrueFi’s goal is to become the ultimate protocol for uncollateralized lending.
To get there, TrueFi must advance in four key ways:
- Expand the set and types of borrowers
- Expand the types of loans
- Improve the efficiency of the TrueFi Credit Model
- Progressively decentralize, to put more of these decisions into the hands of TRU holders
With these improvements, we see a future in which capital moves at an order of magnitude greater efficiency than it does today. In a truly efficient market, a pre-approved borrower can take out a $5 million loan, return it within 30 minutes, and see the same funds immediately borrowed by another borrower. This flow would be powered by a credit model assessing the likelihood of default of every individual borrower 24/7, pricing in every new piece of available information.
In this future, every dollar of capital is instantly allocated to wherever it gets the best risk-adjusted return. We see TrueFi playing a key role in moving finance in this direction, and we’re excited to have you be a part of it.
Get Started: Code & Community
🤝 TrueFi Community: Join the discussion in Discord, Telegram and on Twitter with @TrustToken
👾 TrueFi Product: Explore TrueFi at Truefi.io & learn to use the product with our YouTube video tutorials or our in-depth FAQ.
🔍 Transparency: Review TrueFi’s Dune Analytics dashboards and TRU treasury attestations, provided by top 25 accounting firm Armanino LLP.
💻 TrueFi Technology: Review our technical spec on GitHub, review our audits, or contact security@trusttoken.com for details on our bug bounty program.
Editor’s Note
TrueFi has evolved dramatically since being introduced in November 2020, with the launch of our crypto-native credit model, the exponential growth of the protocol, and the launch of two major upgrades (V2 & V3).
This post was overhauled to reflect these new changes in July 2021. The original TrueFi announcement, published in November 2020 and updated December 2020, is available (unlisted) for historical record here.
