Decentralizing Uncollateralized Lending – The Next Step for DeFi
The last few months have been great for DeFi based lending protocols. This should come as no surprise to anyone because DeFi introduced a lot of improvements and technological modifications to outdated traditional financial mechanisms. It also improved the profitability of lending, in favor of the consumer.
Lending protocols offers much better interest compared to traditional savings accounts found in banks. For example, at the time of writing, TrueFi Lending Pool offers 12.55% APY(and +60% APY after TRU farming incentives), while current savings rate from banks are often less than 1% and sometimes even negative.
All these factors contributed to the tremendous pace of growth of the entire DeFi market and it shows in the numbers. According to Defi Pulse, the entire amount currently locked in DeFi is worth $14.54 billion USD, and the lending market alone is now worth $6 billion USD.
DeFi current success was built on collateralized lending, which for now is the most recognized type of lending. However, the truth is that uncollateralized lending is seen as the next step for DeFi, and that’s exactly why we conducted an AMA about TrueFi with Co-Founder & CEO of TrustToken, Rafael Cosman.
Question #1: What is the difference between TrueFi and TRU?
Rafael: TrueFi is a protocol for uncollateralized lending and TRU is the token that plays an integral role in the TrueFi system. The relationship is similar to the Compound protocol and COMP the token, or the Aave protocol and AAVE the token.
Question #2: How does TrueFi works?
Rafael: It’s a DeFi protocol for uncollateralized lending. So, similar to how Compound and Aave do overcollateralized lending, you could put up $1.50 cents worth of Ethereum and then you can borrow $1 of a stablecoin. TrueFi does uncollateralized lending so you don’t have to put up any collateral and people can actually borrow directly from the protocol and of course that means the protocol has to be very careful about whom it gives loans to and Trust Token holders get to vote on which borrowers they want to borrow from the platform. And so far, the platform has Alameda Research on it that are one of the largest OTC desks and hedge funds in crypto and they’ve borrowed so far about $8.5 million from the protocol. And we’re going to be bringing on several more borrowers and hope to be doing tens or hundreds millions dollars of loans in the coming weeks.
Question #3: What makes TrueFi special?
Rafael: It’s the only major protocol that we know of that’s really dedicated to uncollateralized lending. There’s a whole bunch of protocols that are dedicated to overcollateralized lending but uncollateralized lending is a new and quite difficult problem that very few protocols have really tackled so far. I don’t think that the version of TrueFi that we have out today is perfect, there’s definitely a lot of improvements we wanna be making as we launch TrueFi 2.0 but I think it’s a very good start. And I think we’ve got a good shot at being able to win what’s an extremely valuable market of uncollateralized lending. It could be as big or bigger than the current market for overcollateralized lending, which is already in the multiple of billions. What else makes TrueFi unique is transparency. As a lender you know exactly where your capital is going, how it’s allocated and how it’s earning money. We hope that will prevent undue risk being taken on by these pools. What that means is when you go into a pool, you know what risk profile you’re taking on, you know who’s using the money and you know where that money is. We hope to prevent any major issues that come from unexpected risk. We’ve seen a centralized protocol fall to unknown risk recently. We hope to prevent that kind of thing.
Also, we don’t usually custody the money, so it means that we’re much less prone to certain types of attacks because the money is usually out with lenders or with other earning pools. So we’re a little bit more protected in terms of safety, which is not to say we’re perfectly safe, but there’s less vectors of attack.
The one I also want to add for lenders is just the interest rate. TrueFi has one of the best stable rates in all of DeFi – 11.2% APY and if you farm you can can get even more while Compound offers lower rates, for example 2.9% on DAI and 3.6% on USDC. The reason why TrueFi can offer better rates is because Compound is based on overcollateralized lending and people just aren’t willing to pay as much for an overcollateralized loan. Now, of course, that means the TrueFi protocol may have more risk and we have to have a lot of systems in place to guard against that risk. And that’s part of what the Trust Token voting process is for.
Question #4: What is your view on the current uncollateralized lending industry and its future?
Rafael: Right now uncollateralized lending is a big industry in traditional finance and it’s a big industry in crypto, but it almost all happens off chain in apps like Celsius, Nexo, BlockFi and Genesis who provides uncollateralized lending with institutional counter parties and some individuals, but all of that is is still centralized finance (CeFi) as opposed to DeFi and there is almost no one that is doing right now uncollateralized lending on chain. That’s where we think things are really going to go and if we can establish that uncollateralized lending can be pretty secure and have high APY yields over the long term that is going to attract a lot of capital and we think that a large amount of what’s currently going on in CeFi and traditional finance will have the possibility of moving on chain.
Question #5: What is the current status of the TrueFi platform and what changes can we expect in the future?
Rafael: The TrueFi platform is live and people can earn a great APY, just by putting stable coin in and if you farm, you actually can earn a much higher APY. Some of the farms are currently offering 70 or 80% APY.
We’re working right now on some improvements on every part of TrueFi 2.0. We’re going to make it a lot easier for lenders to get in and out of the pool. We’re gonna be increasing the yield significantly and bringing out a bunch of more additional borrowers and hopefully open that to a much wider audience that can borrow from the platform. So, a lot, a lot of changes coming up in the next couple of months.
Question #6: Is there a roadmap with relevant upgrades or partnerships in the future?
Rafael: Yes, it’s mostly internal for now. We said a little bit about what’s coming up on our blog, but we haven’t laid out a detailed roadmap. Probably we will be sharing more about our roadmap over the coming months. But right now we just launched the product and we’re getting a ton of user feedback and we’re just right now scrambling to fix a lot of things that users want to make the product better.
Question #6: What’s the added value of TrueFi in comparison with other competitors?
Rafael: The first one I’d say it’s one of the highest stable APY yields in crypto right now in DeFi. Though you might find some higher yields in CeFi, TrueFi does offer one of the highest stable yields in DeFi and, with the TRU farming rewards, is quite attractive to anyone seeking the highest possible returns. Transparency is the second one, relative to CeFi again because even when you’re working with a CeFi and you’re getting great returns as a lender you still you don’t know how your money is being allocated. We’ve seen the fall of a centralized platform recently that offered fantastic returns, but with a totally opaque risk profile. That opaque risk ended up eating the entire company alive when the borrower became unable to pay the loan. And this is something that we expect TrueFi platform to mitigate because you know everything’s very much transparent and the risk is clear when you enter any pool.
Question 8: What are the use cases for TrueFi you are looking to cover in the future?
Rafael: I don’t think they use cases are going to change that much. We’re just looking to deliver a higher APY with as low risk as possible and the protocol is going to be lending to more and more borrowers in the future.
We would like to get to the point where, you know, we could have loans out to multiple OTC desks and many other counterparties. Alameda is one of the well respected borrowers who work with us and for example let’s say they had a particular trade they wanted to do and they said, “Hey we want $10 million for just 48 hours”. They could take a loan for 48 hours and then they could send it back and as soon as it gets back that capital could go out to another borrower, who is using it for something else. And there’s just the opportunity. because it’s crypto, for money to move much, much faster than it can in traditional finance. In real time, all the different borrowers can be bidding on how much they want to borrow a certain amount of capital and the market can also be assessing the risk of all these borrowers in real time. Then the system can look at how much the borrowers willing to pay, adjust that for the risk and then allocate capital directly to whoever’s willing or wherever it’s gonna get the best risk-adjusted return
Question 10: How do you want to bring uncollateralized lending into our daily life?
Rafael: The main thing is getting people a great APY so they can have a place that they can stick money and might not be all of their portfolio, because it does come with risk, but at least some of their portfolio and they might be earning 8,9 or 10% pretty stabily. But if some consumer apps want to create great yield opportunities for retail users, there are possibilities to plug our protocol in various ways.
Question 11: What techniques you’ll use to bring TrueFi to people?
Rafael: As we mentioned before we could achieve this in cooperation
with other projects that are build on the TrueFi protocol. We also have a great farming program, which helps to bring a lot of users into TrueFi and make it exciting to jump in. I’d add that we’ve a pretty slick interface on our website. The TrueFi app its one of the only DeFi apps that actually updates in real time. You don’t need to refresh the page and all of these numbers will actually change immediately as soon as the data on the blockchain changes.
Question 12: Is there any interest from enterprises or companies outside of crypto for using TrueFi?
Rafael: There’s a lot of interest from borrowers right now. That’s the main interest that we’ve had and will probably be working on other partnerships down the road and the coming months will be dedicated to bringing more and more borrowers.
Question 13: What are the greatest challenges the TrustToken team are facing at the moment?
Rafael: Right now there’s a lot of product improvements we need to make to get more borrower in the platform right now. The Lending pool is making about 7.8% APY. And we’d like to get that up. I think we can get it up to 9%, 10% or even higher by bringing on more lenders and a couple other product improvements. I think that’s the main thing and then growing the protocol. We want to get from, right now there’s about $15 million into the lending pool which is a good start considering that the protocol was only launched over a week ago, but we want to grow the protocol to be in the hundreds of millions or billions. So we’ve got a long way to go.
Question 14: Have you looked at the possibility for integration of TUSD with cryptocurrency payment solution providers?
Rafael: TUSD already works with some some payment solutions but I don’t think that it’s something that we’re particularly focused on right now.
Question 15: At the time of launch the company was the largest holder of TRU. What’s the plan for the future and will TRU be fully decentralized?
Rafael: The company was one of the largest holders of TRU, but the holdings are actually pretty decentralized. The company actually only owns about 9.5% of all TRU and most of that is locked up, it’s only one third of that that is currently unlocked for the company and the company can actually use. The largest part is the incentive distribution which is 39% of all TRU. And that’s going to go to users of the protocol of various types. So ultimately, we do want the protocol to be very much owned by the users. And that’s a process that’s happening right now there’s millions of TRU token that’s being shot out to users of the protocol today and they’re using it for all kinds of things, including voting on where their loans go.
Question 16: How does borrowing funds from the TrueFi pool work and what’s the role for TRU Stakers in this process?
Rafael: Borrowers go on to the app and click a button saying they want to borrow and they have to just put in the term that they want like 14, 30 or 60 days, the amount of TUSD and the APY they’re willing to pay, and the address to send the TUSD once their loan is approved. That information is sent over to what’s called the credit prediction market which is where Trust Token holders get to vote and say whether they think this is a trustworthy borrower and they feel confident that the loan is going to be paid back. So if the Trust Token stakeholders are all in favor or a large majority are in favor, then the TrueFi pool will make the loan, if not then it won’t. So it’s ultimately up to Trust Token holders to assess what they think about the borrower. And for new borrowers that are applying to be a part of the platform they make a post on our forum with a bunch of information about themselves and the types of loans that they’re looking to do and the community gets to assess and ultimately gets to vote on whether we want to allow that borrower on the platform. Borrowers that may be a little bit less established can join the platform, but might have a lower limit on how much they could borrow. TRU holders can approve them to borrow $10,000 or $100,000, such that if they didn’t pay back one of those loans that the lenders would still be protected. And also the community may establish a backup fund as well because the protocol does collect some fees, similar to how Compound and Aave and other protocols collect fees directly in the protocol and that money can be used by the community for a variety different things, including making sort of a backup fund what’s called a SAFU fund for users if there was any loss.
Question 17: Who can borrow funds from TrueFi?
Rafael: It’s only approved borrowers and to apply they have to post on the forum and get approved by the community and TRU holders.
Question 18: What are the main risks of uncollateralized lending. What can you as a company do to avoid or minimize the risk?
Rafael: So the biggest risk is that someone defaults or doesn’t pay back the loan. There is a binding legal contract between every borrower and our company but in the future it’s going to be a foundation that will be able to pursue a borrower in court if they don’t pay back the loan. That is probably the single biggest risk. The other important factor to know when using TrueFi is that unlike with some other products when you deposit money in the pool that money is being loaned out in what are really illiquid loans so those loans might come back in 14 days and 30 days. Your money isn’t necessarily going to be liquid until those loans come back so it won’t make sense to put money into into TrueFi if you’re only going to leave it in there for a day or for a couple of days. If you’re going to be in the protocol for weeks or months, then it will really make sense for you from a liquidity perspective.
Question 19: How about transparency – can lenders see how their TUSD flows through TrueFi?
Rafael: I think TUSD is the most transparent stablecoin in the entire world. It’s the only stable coin that does real time 24/7 attestations. There’s a third party accounting firm that does those attestations and they publish them online 24/7. But not only that. TrueFi itself is completely transparent on the blockchain. So you can actually see in the app every single loan that has gone out, what the terms are, what the current status of that loan is and Trust Token holders can decide any new loans that the protocol is going to make. So it is an extremely transparent community-oriented project and the protocol is getting more and more decentralized over time even though it was launched a week ago.
Question 20: Can you describe how TrueFi loans are built and how they works on anonymous platform such as Ethereum?
Rafael: Currently the borrower shares their name and some information about themmself and you can actually see in the TrueFi app who each loan is going out to. So currently the platform is not anonymous. As we have new borrowers on the platform they’re going to also be completely transparent to the community and you can even see on-chain the money going out to those addresses and where it goes from there. So the borrower side is not anonymous at all right now. It could be at some point in the future but at least for now I think this makes the community much more comfortable.
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 loan terms without requiring any collateral which is truly uncommon in the DeFi space.
TrueFi is following the ethos of crypto. All lending and borrowing activity on TrueFi is fully transparent. It’s allowing lenders to fully understand participating borrowers and the flows of funds engaging with TrueFi, and it also helps to increase the level of trust in the protocol, which should lead to an increase in the number of users in the future.
The coming months look very promising for TrueFi. The team is looking to launch TrueFi 2.0 with some major improvements such as an increase in APY. Some community suggestions will be implemented in TrueFi 2.0 which shows that the team is listening to the community and their feedback.