Create a TrueFi AMO to provide liquidity directly to the TrueFi Protocol
About TrueFi
TrueFi was DeFi’s first uncollateralized lending protocol. TrueFi aims to be the leading protocol allowing Asset Managers (we call them “portfolio managers”) to run lending strategies on-chain. Apart from already-proven lending strategies to crypto-native institutions, TrueFi is actively working with 3rd party Portfolio Managers who are interested in running their strategies on our protocol.
We are aiming to bridge the gap between RWA and DeFi and provide a platform where RWA originators can access crypto capital.
Since TrueFi’s launch in November 2020
The protocol has originated ~$1.4bn in uncollateralized loans across 121 loans and ~35 borrowers with 0 defaults.
The protocol currently supports USDC, USDT, TUSD, and BUSD and offers loans ranging from 30 to 180 days.
Average borrower rates (without token incentives) are roughly 9.5% with a range from 7.16% - 18%.
Total interest generated between November 2020 and today is 19.32mm USD
Background and Motivation
Stablecoins (such as FRAX) are money-printing machines that have the potential to completely alter how we think about capital deployment and the cost of capital within the crypto markets. TrueFi has proven itself to be a reliable source of yield for crypto lenders and would like to partner with FRAX as a source of reliable revenue for the protocol.
For this first AMO, the idea is to generate yield for FRAX while also tapping into a new source of liquidity for TrueFi (win/win situation). Longer-term there are a number of additional partnership opportunities that we could pursue:
Given our large base of trading and market-making firms along with TrueFi’s plans for L2 expansion, we can help to create market-maker-focused lending pools to increase FRAX liquidity on L2s.
In addition, we will be onboarding several RWA-type lending opportunities over the coming months and if FRAX would like exposure to those types of opportunities, we are happy to present those, as well.
For the initial proposal, we will seek USDC and FRAX liquidity. For USDC, we have several products that FRAX could deposit the USDC into, including our permissionless pools. We also have products such as an “Alameda single-borrower pool” where Alameda is the only borrower in the pool. For FRAX liquidity, we would aim to create a new FRAX pool where we will have many of the same market makers on the platform borrowing FRAX. Once approved, we will work with the FRAX team to decide on the optimal pool/portfolio to deposit the funds into based on FRAX’s preference for yield/risk/duration.
Excited for the opportunity to partner!
Proposal
Create a TrueFi AMO and authorize up to $100m worth of liquidity for use in the AMO ($50mm in USDC, $50mm in FRAX).
adding more options for FRAX use and increasing the market making operations (most loans are to market makers) in FRAX pairs should be good for FRAX overall
what is the worst case risk exposure we would get from this?
lets say , Alamenda borrow the max, and then default. would it be FRAX taking all the risk or is it shared across all investors in the TrueFi protocol ?
The majority of our existing loans have gone to reputable crypto firms (Alameda, Wintermute, etc.) where we’re doing a detailed analysis of their financials, existing debt, and a number of other factors. I think the fact that there have not yet been any defaults and that we’ve been able to bring on a number of smaller, lesser-known borrowers is a testament to the quality of our underwriting standards to date. That said, there is of course default risk on an uncollateralized loan.
Underwriting in our existing pools includes a comprehensive borrower diligence review including analyzing asset coverage, reviewing structural considerations and modeling recovery scenarios in the unlikely event of an administrative proceeding.
Some (non-comprehensive examples) of how we mitigate default risk in our founding pools include:
a. Rigorous onboarding, including deep financial DD & KYB
b. Restricting borrower scale-up based on repayment history
c. Strict requirements around maintenance covenants
d. Quarterly or monthly reporting requirements from borrowers
e. Borrowers are contractually required to represent their financial position and ability to service new indebtedness
You can find more in the underwriting section of our docs, here.
Besides the docs mentioned above, we’ve written a pretty extensive blog post on the topic. If you feel this is not satisfactory or still have questions, please ask and I will answer.
For our first pool with FRAX, we would plan to only underwrite our most creditworthy/largest borrowers to decrease the risk of default.
For future pools with FRAX, we are building pool-by-pool tranching so that (if desired) FRAX will only be lending to the senior tranche (taking a lower rate and also taking on less default risk).
Past those precautions, TrueFi would follow the default and collections response described above.
Hey really like this proposal. How does the loan system work? I see that there are several tUSD pool, does that mean that someone provides liquidity on the pool and is able to withdraw at any time, but it is more convenient to withdraw after a borrower has paid? And how soon-ish could a Frax pool be created?
technically, today. I think we will want to line up borrowers before we deploy the pool though so that we can quickly get to 80-100% utilization on day 1.
@sparkes25 - @ryanrodenbaugh already answered your question above and linked the documents and blog post with the full processes for default - from the blog post:
As an example:
*. Let’s say the TrueFi-TUSD lending pool makes a loan of $5m to a borrower that defaults (the “Lenders” are owed money)
*. Up to 10% of TRU from the staking pool (the “Stakers” assets) will be liquidated to make the TrueFi-TUSD lending pool whole.
*. The tokens representing the defaulted loan are transferred to the stakers liquidated in step 2. These tokens are now worth less than they would be if the loan did not default.
*. The legal process to recover the delinquent funds commences. Let’s assume that the delinquent borrower pays back the whole $5m plus interest. That money is used to compensate the defaulting loan tokens that are held by the TRUstakers who made the TrueFi-TUSD lending pool whole during liquidation. If the legal process recovers less than the amount of the defaulted loan, TRU stakers could suffer a loss.
Thanks for taking the time to post this @ryanrodenbaugh - I am very supportive of this proposal - loans like these are going to be a great source of revenue for Frax!
