TrueFi DAO, Step 1: Launch of On-Chain Governance & Call for Delegates

Step 1 of 3: Proposing TrueFi’s Next Step towards Full Decentralization

TrueFi’s goal is to build a publicly owned & operated financial utility for global lending. As open-source unsecured lending infrastructure with +$1.4B in loans originated, +$1.1B in repayments, and zero defaults, TrueFi is well on its way.

To become a trillion-dollar open-source protocol, it’s essential that TrueFi can support every kind of lending, including meeting institutional and individual requirements for products that can be successfully launched and operated even if TrustToken ceased operations. These updates are expected to make TrueFi’s composable lending infrastructure more robust and resilient, as well as fully move control of the protocol into the hands of its users.

To accomplish that, TrueFi’s priority is furthering the protocol’s journey through progressive decentralization.

Today, we introduce the first of three proposals designed to make TrueFi among the most robust community-run protocols in DeFi, while introducing a few design choices that will allow the protocol to safely grow at the fastest possible rate, in alignment with the best interest of the protocol’s users and token holders.

In Summary:

• The proposal detailed here will be discussed and voted on via TrueFi’s current governance flow.
• Full decentralization is TrueFi’s #1 priority. The intended steps to accomplish this transition are: (1) the launch of on-chain governance, (2) the launch of a foundation to support the TrueFi Decentralized Autonomous Organization (“DAO”), and (3) the launch of off-chain governance and a TrueFi board to support the protocol’s activities both on and off-chain. The latter two steps will be detailed in future blog posts.
• TrueFi & TrustToken will operate as two separate and independent entities. The TrueFi protocol will be run by a DAO composed of a set of on-chain governance mechanisms that control the open-source protocol as well as an off-chain corporate entity. The TrustToken team will act as one of many portfolio managers and provide arm’s-length services to the DAO, with a special focus on growing the protocol by bringing third-party TradFi institutions on-chain. TrustToken will derive no special privileges nor protocol-level fees through this activity, and will ultimately compete with other service providers and portfolio managers for business and liquidity on TrueFi.
• Any stkTRU holder will now be able to direct and participate in on-chain governance, including making proposals or voting to change how the protocol is designed and governed. The process for governance will change slightly from today’s workflow to accommodate these changes. stkTRU holders may also choose to delegate their voting power (proportional to their stkTRU holdings) to other community members.

Chronicling TrueFi’s Decentralization Journey

To date, TrueFi has been run (like many of the best protocols before it) under the direction of the TrustToken core team. The core team has made good faith efforts to implement a plan of progressive decentralization that puts the ownership, control, and development of the protocol fully in the hands of its users.

Since launch, TrustToken provided a number of centralized functions necessary for TrueFi’s success, such as:

• Credit & compliance services: initial due diligence, credit underwriting, drafting Master Loan Agreements, borrower compliance checks, and creating a decentralized framework for the collection of defaulted loans (if necessary).
• Technical & product contributions: developing a product roadmap, maintaining the smart contract code, creating best-in-class dApp security practices
• Marketing & governance management: owning critical communication and community management functions, and overseeing the design and progress of governance proposals through TrueFi’s first version of its governance workflow.

Each of these functions were performed with constant input from TRU holders in public channels, like the TrueFi Discord and Forum. New borrowers and individual loans are explicitly reviewed and approved by TRU holders, including requests made by the TrustToken core team. Additionally, TrustToken enjoys no special privilege as a user of the TrueFi protocol by design, nor does it earn any special fees. Instead, all fees earned have been directed to the TrueFi DAO treasury, which has already earned over $25,000 and paid out over $2m to TRU stakers.

Above all, the distribution of the TRU token as incentives to those using the protocol was designed from the start to make TrueFi’s most active participants its largest stakeholders. With the launch of on-chain governance, staked TRU (“stkTRU” for short) will now become the voting token, with each stkTRU conveying one vote.

The TrustToken team has already ceded key elements of control to the protocol, and aims to see TrueFi decentralized to such a degree where the core team can completely dissolve without impacting the functionality or success of the protocol.

The launch of on-chain governance and the critical role stkTRU plays in guiding this evolution, are further detailed below.

TrueFi’s Future: A Publicly Owned & Operated Financial Utility

With the launch of on-chain governance, TrueFi & TrustToken will operate completely independently: TrueFi’s decentralized open-source lending infrastructure will be used by a number of centralized businesses, including TrustToken. This model is not dissimilar to how the Internet Message Access Protocol (“IMAP”) functions as one of the Internet’s open protocol standards used by various centralized email clients like Gmail.

To fully realize this model, TrueFi will complete three major steps towards full decentralization, which aim to be fully delivered before the end of Q2 2022:

• On-Chain Governance & stkTRU Delegation will add formal stkTRU voting for most TrueFi matters to an updated governance workflow. It will also see the launch of a more decentralized solution to TrueFi’s permissionless lending pools and support for stkTRU delegation.
• The Announcement of a Corporate DAO Entity will introduce the legal entity that acts as the protocol’s “anchor” to the off-chain world. It will be home to the many off-chain assets, protocol treasury, license agreements, and contractual obligations that are necessary for the protocol’s success.
• Launch of Off-Chain Governance & Election of Operating Board, which will help the DAO operate with maximum effectiveness, especially in the face of edge scenarios like governance attacks, loan defaults, and governance motions requiring multi-party coordination.

Changes Coming to TrueFi with the Launch of On-Chain Governance

As part of the launch of on-chain governance, a number of operational and governance elements of TrueFi are changing. The non-exhaustive list below highlights some of the most important changes.

Control of the TrueFi Protocol & Its Assets

To date, TrueFi’s smart contracts and core assets have been owned and managed by TrustToken, always under the guidance and in the best interest of protocol users and TRU token holders.

Now, with the launch of on-chain governance, TrustToken, Inc will operate as a privately-run, for-profit business making contributions for the success of the TrueFi protocol. Specifically, subject to the approval of stkTRU voters, it will focus on offering services intended to bridge the gap between traditional finance and the TrueFi protocol.

TrueFi will become an open-source, community-run protocol, governed by a DAO that is supported by an off-chain corporate entity. The DAO will own TrueFi’s smart contracts, control the DAO treasury, develop necessary contracts such as master lending agreements, and more. The DAO will be governed by holders of stkTRU, as well as a DAO board of directors elected by stkTRU holders, acting to keep the protocol safe and representing the best interest of TrueFi’s users.

Alongside this change, most TrustToken-branded social properties representing TrueFi will be renamed to reflect DAO ownership.

To start, the TrustToken Twitter will be converted to @TrueFiDAO.

Portfolio Manager Onboarding & Protocol Fees

The launch of TrueFi’s lending marketplace has invited independent portfolio managers (PMs) to launch their own proprietary financial opportunities on-chain using TrueFi’s composable open-source lending infrastructure. PMs own the portfolio’s smart contract administrative keys and are fully responsible for operating their portfolio. This includes the selection of lenders and borrowers, screening these parties through AML/CFT compliance processes as necessary, and executing lending agreements with each borrower.

To date, PMs have needed to enter into a service agreement with TrustToken to design and launch their portfolio, as well as for specialized compliance services.

With the launch of the TrueFi DAO, certain services will no longer be provided by TrustToken, but by the DAO. In return, PMs pay a 0.50% annual fee on all outstanding loans in their portfolio to the TrueFi DAO Treasury in the form of a protocol fee. The DAO may choose to employ TrustToken or a competing service provider to assist with any element of portfolio operations.

At the same time, TrustToken may choose to launch its own TrueFi portfolios, pending community approval, which will be subject to the same commercial terms as all other PMs.

Changes to the Governance Process

TrueFi has always been shaped by its community — even its name was derived from a community discussion before the protocol’s November 2020 launch. This dialogue between the core team and the community was formalized into the first iteration of a governance process facilitated by TrustToken.

To date, new ideas have usually been discussed in the TrueFi Discord channel, then moved the TrueFi Forum for deeper debate and a sentiment vote, and finally escalated to a Snapshot proposal that requires participants use their TRU and stkTRU to vote.

The launch of on-chain voting changes the way ideas turn into protocol-level changes by removing TrustToken as a governance facilitator, putting ultimate power in the hands of stkTRU holders, and adding certain checks and balances on TrueFi governance designed to keep the protocol safe.

TrueFi’s new on-chain governance workflow will work as follows:

1. Discord discussion: New ideas may first be discussed in the TrueFi Discord to build consensus and refine the idea before a formal proposal.
2. Forum poll: The idea is published as a proposal to the TrueFi Forum, where it’ll be subject to 3–5 days of discussion culminating in a non-binding poll, usually “For” or “Against.”
3. Snapshot vote: The final proposal is brought to Snapshot vote by one of its authors, requiring community members to vote on it using a wallet holding stkTRU to establish a simple majority. The results of the forum poll and Snapshot vote are non-binding, except for proposals dealing exclusively with off-chain actions (such as electing or terminating a DAO board member).
4. On-chain vote: After a successful Snapshot, the final proposal is brought to all stkTRU holders for an on-chain vote, along with a set of transactions that will be automatically executed if the proposal is approved. This process is handled using OpenZeppelin standard Governor smart contracts and the Tally front end. The full governance process is estimated to take 1–2 weeks from start to finish.

While TrueFi’s new governance process totally eliminates the need for core team involvement in the evolution of the protocol, it necessitates the DAO take steps to protect itself from malicious actors. To prevent governance attacks, problematic code merges, and pure negligence, the TrueFi governance process is supported by a number of controls at both the smart contract and operational level:

1. Minimum stkTRU holdings: While anyone can complete the first three steps of a proposal’s governance process, submission of a proposal to a binding on-chain vote will require the author to hold a minimum of 100,000 stkTRU.
2. Quorum & Approval Threshold: In order for an on-chain proposal to pass, it must meet a minimum quorum vote of 15% of all outstanding stkTRU tokens and final approval threshold of more than 50% of votes cast.
3. Timelock: If a proposal passes, the transaction is queued in a Timelock smart contract which allows for automatic on-chain execution after 2 days.
4. DAO Board: Besides managing certain day-to-day legal, tax, and compliance matters, the chief responsibility of the DAO Board is reviewing incoming approved and Timelocked proposals for modifications or outright veto. DAO Board members are elected by, serve at the pleasure of, and may be terminated by stkTRU holders.
5. Developer Multisig: An elected group of technical contributors to TrueFi will hold the power to freeze code merges to the protocol if the changes are thought to be harmful to the protocol or its users. The holders of the developer multisig are elected by, serve at the pleasure of, and may be terminated by sktTRU holders.

While the proposed design of TrueFi governance is believed to offer the TrueFi protocol the most effective standard for guiding the future of the protocol, stkTRU holders may use their governance powers to change nearly any aspect of the governance process, especially as the needs of TrueFi evolve over time.

TrueFi’s Decentralized Master Lending Agreement (“dMLA”)

Master Lending Agreements (MLAs), outlining the scope and agreements between borrowers and lenders, are a necessary part of uncollateralized on-chain lending. The first iteration of TrueFi’s permissionless lending pools involved a TrustToken subsidiary as a centralized counterparty to MLAs signed by TrueFi’s borrowers. However, new open-source tools are now available to help move TrueFi’s permissionless lending pools further along the path to full decentralization.

To fully decentralize, TrueFi must be able to process and enforce MLAs without TrustToken’s involvement, while continuing to prioritize the safety of lenders and borrowers. This led the core team to develop a decentralized MLA (“dMLA”), a new primitive allowing lending agreements to be executed with no centralized authority. Modeled after syndicated loans used by the world’s largest financial institutions, the dMLA introduces a new flow of funds to TrueFi’s permissionless lending pools:

1. On-Chain Signature: Lenders in TrueFi’s lending pools will sign an on-chain transaction agreeing to a new MLA that is permanently hashed on Arweave, where they agree to lend stablecoins directly to borrowers. Borrowers must also sign a similar dMLA on-chain, agreeing to borrow funds directly from these lenders.
2. Delegating Collections: Certain legal entities elected by the TrueFi DAO will act as the administrative agent of the dMLA and will pursue any defaults on behalf of lenders. The TrueFi DAO may draft different dMLAs for certain lending pools.
3. Loan Requests: Borrowers will submit individual loan applications detailing the desired loan amount, interest rate offered, loan term, evidence of completed and approved KYC, and optional evidence of credit scoring provided by an approved DeFi credit underwriter.
4. DAO Vote: stkTRU holders will continue to review each loan request from a borrower and vote to approve or reject the loan application.

Despite this change to the flow of funds, lenders into TrueFi’s permissionless legacy lending pools will continue to enjoy loss protection from assurance provided by staked TRU, the Secured Assets Fund for Users (“SAFU”), and a signed dMLA that will be enforced against defaulting borrowers by the administrative agent. The DAO will also take over TrustToken’s use of TRM’s risk management and compliance tools for monitoring lenders’ transactions.

Split of DAO Managed Lending Pools & PM Managed Portfolios

TrueFi’s first set of permissionless lending pools, which have allocated over $1 billion dollars in various stablecoins to the top crypto-native borrowers, were launched before the protocol could support a true decentralized lending flow. This legacy design meant that, though the portfolios made loans under clear direction from TRU holders, TrustToken was forced to play a role in the lending pools’ operations.

To both further TrueFi’s decentralization and grow TVL and TVO, all lending managed by the DAO (in the form of the tfUSDC, tfTUSD, tfUSDT, and tfBUSD permissionless lending pools) will be formally split from the permissioned lending portfolios managed by centralized portfolio managers building on top of TrueFi. TrustToken may build out its own proprietary lending book of business or facilitate the formation of various limited partnerships to attract institutional capital to TrueFi.

This change has three material changes on DAO-managed lending:

• Incoming loan requests to the permissionless lending pools will no longer undergo TrustToken’s centralized underwriting process. Borrowers will have the option to include a DeFi credit score from any number of DAO-approved DeFi credit scoring protocols to help communicate their creditworthiness to the stkTRU holders reviewing and approving the loan requests.
• Each new loan will be governed by a dMLA, the many-to-many syndicated loan agreement introduced above. TrustToken and its affiliated entities will no longer be involved as a counterparty.
• The administrative agent named in the applicable dMLA will be responsible for collecting from any borrowers that default on their loan obligations.

This protocol update furthers the community’s control of the DAO’s permissionless lending pools, which demands that lenders to these pools understand the new risks. Namely, this means fully understanding that stkTRU holders will be making all lending decisions, without any centralized oversight, while relying on decentralized credit scoring and DAO-directed collections in case of default.

With this split, TrustToken becomes just another TrueFi user with no privileged position. Finally, lenders that only want exposure to TrustToken-directed portfolios must move from the DAO’s permissionless lending pools to their permissioned portfolio.

Open-Sourcing the TrueFi Front-End

TrueFi’s open-source front end, currently facilitating portfolio access for lenders, borrowers, and portfolio managers, will now be maintained by the TrueFi DAO. Independent portfolio managers — including TrustToken — wishing to see their financial opportunities presented to TrueFi’s users will need to first be approved by the DAO for inclusion in the front-end.

As always, anyone with sufficient technical experience may use the protocol directly at the smart contract level, and now, even build their own front-end to TrueFi for use as a stand-alone project or to showcase their TrueFi portfolios on their own website.

Launch of stkTRU Delegation

To prioritize rapid and effective governance, TrueFi will support a stkTRU delegation program. This will allow any stkTRU holder to assign the governance value of their stkTRU holdings to any other wallet of their choosing, thereby letting the chosen delegate represent their governance interest in TrueFi.

To accomplish delegating one’s stkTRU to a chosen wallet, one must call the delegate() function in the smart contract and specify the receiving address. We invite members of the TrueFi DAO to develop a frontend for this process if they believe it would serve the protocol.

Any member of the TrueFi community may campaign to become a governance representative and receive delegated stkTRU governance power in the Forum, Discord, Twitter, or beyond — starting today!

What’s Next: DAO Proposal Vote, a Call for Delegates, & Testing TrueFi Governance

This DAO proposal will be put up for discussion on the TrueFi Forum within two weeks, and an ultimate Snapshot vote will follow approximately three days thereafter. If approved, the TrustToken team will begin launching the on-chain governance smart contracts and submitting a number of proposals to realize the proposed changes. These updates will be communicated on TrueFi’s Twitter and Discord, and proposals will appear in the forum.

In the meantime, anyone in the TrueFi community interested in representing their fellow stkTRU holders is invited to propose their governing platform and request delegated stkTRU. We recommend starting your campaign in the forum.

Read on below for the 2nd step of TrueFi’s decentralization journey, the launch of the TrueFi Foundation:

TrueFi DAO: Announcing the TrueFi Foundation