TrueFi is a decentralized finance (DeFi) protocol for uncollateralized lending, launched by the TrustToken team. The team is known for their TUSD stablecoin. It primarily caters to institutions and market makers seeking uncollateralized credit lending. Users can deposit TUSD, USDT, USDC, and BUSD as lenders, while borrowers need to submit loan proposals through official applications and have them voted on by TRU token holders to determine whether the loan should be disbursed.

The Expansion Challenges Faced by TrueFi

TrueFi facilitates loan issuance through an institutional whitelist, imposing high requirements on lending institutions to mitigate default risks. In the event of a default, TrueFi’s approach is to first absorb losses through the SAFU (500,000 TRU tokens from the official supply) and TRU token pledgers. If these measures are still insufficient to cover the bad debt, depositors are then responsible for the remaining default losses. Subsequently, the full value of the defaulted loan is written off, and legal action is initiated against the defaulting debtor. Successful loan recovery through litigation results in the restoration of funds for the borrower, pledgers, and SAFU.

Therefore, the protocol’s business expansion faces two challenges: the scale of loan demand and the platform’s ability to attract deposits. Based on the development of existing DID infrastructure, it is unlikely that TrueFi will provide uncollateralized lending to ordinary users in the short term. The expansion of loan demand mainly comes from institutional sources.

The platform offers base interest returns to stablecoin providers, with token subsidies provided to TRU pledgers. Thus, for stablecoin providers, the platform’s appeal lies in the low default risk presented by institutional borrowers. However, in a bear market where institutions frequently expose themselves, stablecoin providers also face increased risks. This point is reflected in TrueFi’s current Total Value Locked (TVL) of only $5.6 million in USDC.

Therefore, TrueFi’s product is better suited for a bull market. Under an upward trend, cryptocurrency institutions operate well and require more funds for market arbitrage or strategy execution, thereby boosting the scale of TrueFi’s lending.

On the other hand, TRU pledgers currently bear the main risk. As the liquidity incentives end in 2024, TrueFi needs to introduce new incentive mechanisms to encourage TRU pledgers to continue bearing this risk.

Regarding tokens, TRU token pledgers and stablecoin providers can receive TRU tokens as liquidity incentives. However, last December, considering the weak demand for lending from the existing fund pools, the community decided to discontinue providing liquidity incentives to the BUSD and USDT pools. Furthermore, the incentives for the USDC pool were reduced to 1,000 TUR per day. This is the direct reason why TrueFi’s stablecoin pool currently only has liquidity in USDC. Therefore, despite the continuous issuance of TUSD, the lack of liquidity incentives for TUSD in TrueFi’s pool also means that there is no direct motivation for TUSD to flow into TrueFi.

Overall, TrueFi has not implemented additional measures or mechanisms to increase the scale of platform liquidity. On the contrary, liquidity incentives for the pools have been reduced based on market conditions. This is the main reason why the TVL in the stablecoin portion of TrueFi is only $5.6 million.

Therefore, a point to consider in the future is whether TrueFi will take into account the growth of the existing TUSD pool and propose increased liquidity incentives for the TUSD pool. This approach may help TrueFi achieve a larger TVL. In the bear market phase, institutional lending operations may lean toward caution, so the short-term growth of TrueFi’s business may not be substantial.

How TrueFi Works

Currently, there are two products offered by TrueFi: TrueFi DAO Pools, which focus on stablecoin lending, and TrueFi Capital Markets, managed by external entities and allowing for additional loan currency options.

Product 1 - TrueFi DAO Pools, officially managed and targeted towards institutional users:

The current lending operations are concentrated in the USDC pool, with an impressive interest rate of 99%. The pool’s size is approximately $5.6 million, and all three other pools are fully available for lending.

Borrower Logic:

Borrowers:

To initiate a loan application, borrowers must possess a minimum of $10 million in debt-free assets and undergo KYC/AML verification. Only after being whitelisted can they proceed with their loan request. In case of default, TrustToken.Inc will pursue legal action for debt recovery.

Current whitelist users include 36 entities such as Amber Group and Alameda Research：

Lenders:

Users can choose to deposit BUSD, USDC, USDT, and TUSD stablecoins and receive tfTokens representing their principal and interest. tfTokens reflect the depositor’s share of the pool and can be traded. As the pool generates profits and lends assets to borrowers, the pool’s value fluctuates, influencing the value of tfTokens held by users.

PtfTUSD = Total value of the pool assets / Pool token shares

Example: Let’s assume User A deposits 2 million TUSD into the pool and receives 2 million tfTUSD. On the second day, User B borrows 1 million TUSD for a 30-day loan at an annual interest rate of 12%. At the end of the second day, the pool’s value is 1 million TUSD. Sixteen days later, the total pool value equals the loan principal of 1 million TUSD plus 4931.5 in interest plus the remaining value in the pool, totaling 2,004,932 TUSD. Therefore, the value of each tfTUSD is 2,004,932/2,000,000 = 1.002465 TUSD.

Stakers:

Every loan requires approval through voting by TRU stakers. By staking TRU, participants can earn loan fees (10% of the interest), protocol fees (associated with third-party managed loan pools), and TRU token incentives (39% of the total token supply allocated daily to stakers based on their proportionate stake).

Each loan requires at least 80% approval and a minimum of 15 million votes to pass. The voting window remains open for at least two days, and if the minimum criteria are not met within this timeframe, the voting window can be extended. Otherwise, borrowers may choose to renegotiate or withdraw their requests.

In the event of default, a certain percentage of TRU collateral will be liquidated and transferred to the TrueFi lending pool. By default, the maximum liquidation ratio for the TRU collateral pool is set at 10%. This means that if the default exceeds the maximum liquidation amount, the remaining portion becomes the responsibility of the stablecoin providers.

Product 2 - TrueFi Capital Markets, catering to users who have completed KYC verification.

The lending pool, managed by a third-party institution, requires an official application to be constructed. Currently, there are three pools available:

Users need to be whitelisted after completing KYC verification in order to borrow, and they must be non-US users. Such pools require two types of fees: protocol fees and portfolio fees. The specific values are determined by the institution that constructs the pool, and these fees are directly deposited into the institution’s address.

TrueFi also establishes a pool specifically for individual borrowers called “Lines of Credit.” This type of credit loan is initiated by the borrower, but with a few differences: this pool only lends to a single borrower, and the interest rate is no longer fixed. Instead, it is determined by a pricing formula based on the utilization rate of funds. Additionally, an automated credit rating system is implemented to achieve personalized, open-ended loans with variable interest rates.

Performance of the Protocol Data:

In terms of Total Value Locked (TVL), it is currently around $32 million. This mainly consists of approximately $5.6 million USDC in the stablecoin pool, around $230,000 in liquidity from third-party institutional pools, and a collateralized amount of approximately $23 million in TRU tokens. The protocol has cumulatively disbursed $170 million in loans and generated fee income of $40.2 million.

The historical borrowing records total 152 transactions, as follows:

Currently, TrueTrading Asset Management has borrowed a total of $5.6 million in USDC, which is the only active loan at the moment. The official dashboard indicates that there have been two defaults, totaling approximately $4.4 million in value.

Looking at the entire loan history, no other institutions have borrowed from TrueFi since September last year：

Overall, the performance of TrueFi seems to be impacted by the bear market and the frequent exposure of institutions. At this stage, the business volume of TrueFi is relatively small, with a TVL of $30 million, of which only $5.6 million is in USDC liquidity and $2.3 million is provided by third-party institutions, accounting for 26% of the total. The remaining portion consists of TRU token staking. The team is unable to increase the pool’s liquidity.

Economic Model

The TrueFi token, abbreviated as TRU, has a total supply of 1.45 billion, with the initial allocation as follows:

Circulation Overview:

TRU has four main use cases within TrueFi: staking, which allows for approving or rejecting new loans; SAFU, the safety reserve fund that compensates depositors in the event of defaults; governance, enabling on-chain voting for protocol-level changes and community decisions, such as funding from the TRU treasury; and providing liquidity, serving as rewards for liquidity mining.

TrueFi was initially launched in 2018 by TrustToken, the company behind the stablecoin TUSD. Through a SAFT token sale to accredited CoinList investors and venture capital firms, TrueFi raised over $31 million at a price ranging from $0.08 to $0.12 per token.

On August 5, 2021, TrueFi secured a $12.5 million financing round led by prominent investment firms such as a16z, BlockTower, and Alameda Research. This round of funding was completed through institutional token purchases with a one-year lock-up period.

Regarding liquidity mining, the initial distribution was set as follows: 32.4% of the total token supply was allocated to stablecoin providers, while 48.6% was designated for TRU stakers. This means that stablecoin providers have the opportunity to receive TRU tokens as rewards. See the diagram below for reference:

TRU Incentive Pool Allocation Ratios:

Nexus Mutual: 0.5%

TRU Voters: 48.6%

TrueFi Loan Pool:32.4%

Balancer BAL/DAI/TRU: 2.2%

Uniswap ETH/TRU: 9.7%

Uniswap TUSD/LP: 6.5%

However, in December 2022, the community passed a proposal considering the lack of demand for borrowing from the existing fund pools. As a result, the community decided to discontinue providing liquidity incentives for the BUSD and USDT pools. Furthermore, the incentive for the USDC pool was reduced to 1000 TUR per day. This is the primary reason why the current TrueFi stablecoin pool only has significant liquidity for USDC.

Conclusion

Currently, TrueFi has not implemented any additional measures to increase the platform’s liquidity. Instead, liquidity incentives for the pools have been reduced due to market conditions. This is one of the main reasons why the TVL in the stablecoin section is currently only $5.6 million. Going forward, it would be worth monitoring whether TrueFi considers providing liquidity incentives for the TUSD pool, given the growth in TUSD’s size. This approach could potentially help TrueFi attract a larger TVL. During bear markets, institutions may also exercise caution when it comes to lending operations, so it is unlikely that TrueFi’s business will experience significant growth in the short term.