TrueFi Institutional Upgrade
Q4 2022: Standardizing TrueFi for institutional adoption
In the 22 months since issuing the first uncollateralized on-chain loan in November 2020, TrueFi has originated nearly $2 billion in aggregate loan value, while paying out more than $34 million to lenders and approximately $3 million to token holders and the TrueFi treasury. TrueFi has been able to grow this lending book while maintaining a perfect repayment rate, even through DeFi’s recent credit crunch.
In the last two months, the credit committee secured early repayment on TrueFi’s TPS Capital loan and successfully negotiated the first on-chain loan restructuring with Blockwater, which is now in active repayment. While defaults are an expected part of the credit industry, the committee continues to maintain regular conversations with all of TrueFi’s borrowers, is actively managing the health of the TrueFi lending book, and remains involved in originating new loans on the protocol.
We are building on this momentum during the final quarter of 2022, in which TrueFi plans to bring the protocol’s lending products closer to feature parity with offerings found in traditional finance.
With structured portfolios that can attract capital from a variety of risk profiles, new credit vaults that can be easily integrated by other protocols, and improved fee structures and utility for TRU, TrueFi is being designed to take new institutional inflows from traditional finance and DeFi alike. With time, we’re confident these changes will make TrueFi core infrastructure for global lending.
🏗 Structured Portfolios
TrueFi has earned interest from institutional investors, and with this upgrade, we’re building the rails to turn this enthusiasm into lending activity. In discussions with both DeFi capital allocators like MakerDAO and Frax as well as traditional financial institutions, we learned a lot about the features and support institutions require to get meaningfully involved in TrueFi’s portfolios. The launch of structured portfolios is our response to the growing institutional demand in TrueFi.
Structured portfolios will introduce portfolio tranching, which will allow institutional and retail lenders to lend to distinct “slices” of a given portfolio, each with their own risk-reward profile. Structured portfolios will now also support a new capital formation period, during which lender liquidity allocated to the portfolio is not released to the portfolio manager (“PM”) until certain criteria are met.
These two features have been the most requested additions to TrueFi portfolios from our network of institutional partners, and we expect their launch to open the door to new sources of capital.
Portfolio Tranching
A tranche (from French, a “slice” or “portion”) refers to a financial product that can be split into distinct pieces that can be offered to buyers or lenders, each with their own risk-reward profile.
TrueFi will support tranching for structured portfolios, with up to three tranches, which the junior tranche enjoying the most attractive yields but also the first pool of capital to absorb losses, and the senior tranche receiving slightly lower yields but being the last to be affected by any loan defaults in the pool (specifically, only after the previous tranches are exhausted).
Tranches may be open to all lenders or restricted to lenders meeting specific criteria (like accreditation or lender’s country of residence). Portfolio managers may also choose to make a given tranche open to only a specific lender or specific set of lenders, further supporting institutional inflows for a specific level of risk tolerance and paving the way for comparatively low-risk, fixed-interest lending in TrueFi’s senior & mezzanine tranches.
Capital Formation Period
The capital formation period protects lenders from committing capital to a portfolio that does not meet stated requirements. During the capital allocation phase, lenders can enter one or more tranches of the portfolio, but the portfolio managers are not allowed to touch lender funds until requirements are satisfied, such as minimum sizes for each tranche or minimum proportions between tranches. If requirements are not satisfied by the end of the period, then capital is returned to lenders with no additional fees.
With this upgrade, portfolios can enable an originator to contribute first loss capital to a deal. Senior tranche lenders can participate with on-chain guarantees that at least a certain level of junior liquidity is in the capital stack, giving TrueFi the ability to attract lenders with a variety of needs and risk profiles.
🏦 Introducing Credit Vaults
TrueFi portfolios are already one of DeFi’s most flexible asset management vehicles, supporting both a billion-dollar crypto debt market, and facilitating lending into emerging markets, fintech businesses, and real estate.
Interoperability and flexibility are the next evolutions for TrueFi portfolios. Built on top of the ERC-4626 vault standard, TrueFi’s portfolios are being redesigned to function as credit vaults housing real-world debt wrapped in a standardized format composable with other DeFi protocols.
This feature set is currently in the design process and remains subject to change. Furthermore, while not yet formally on the roadmap, we are also exploring features such as loan collateralization.
Unlocking Portfolio-to-Portfolio Lending with ERC-4626 Standardization
TrueFi will adapt portfolios and loans to the ERC-4626 Tokenized Vault Standard, effectively launching “credit vaults” and unlocking the ability for PMs to create a “fund of funds” and move TrueFi loans between portfolios.
Composability of TrueFi portfolios: TrueFi’s newly standardized portfolios will allow managers to direct capital into direct loans to borrowers, into other portfolios on TrueFi, as well as to other tokenized vaults across DeFi. The upgrade also enables PMs and external users to integrate TrueFi vaults into other DeFi protocols (such as creating a Yearn vault strategy) for the purposes of attracting liquidity, adding diversification to an existing opportunity, and more.
Composability of TrueFi loans: With a redesign of not just TrueFi portfolios but also individual TrueFi loans to the ERC-4626 standard, the protocol will unlock the ability for portfolio managers to trade an outstanding loan to another portfolio — without trading tfTokens (TrueFi’s LP tokens held by lenders) directly. This feature is still being developed and is subject to change.
These new lending options pave the way for novel funding vehicles to be built on TrueFi, such as index funds, fund-of-funds, and diversified managed portfolios.
Customizable Repayments
DeFi’s recent credit crunch proves the importance of giving underwriters tools for managing outstanding loan obligations. TrueFi’s institutional upgrade introduces new repayment options for borrowers seeking early repayment or refinancing on an outstanding loan, especially useful for restructuring an at-risk obligation.
These tools will give PMs more flexibility for negotiating with their borrowers and additional options for preventing an outright default.
🧮 TRU Token Utility & Fee Rework
The utility of the TRU token has already evolved significantly since its inception, with changes to loan voting and the launch of binding on-chain governance being among the most significant. As TrueFi evolves into 2023, so too will its native token TRU. Core contributors and community members will collaborate to enhance the TRU token design and utility, targeting a formal proposal of changes within Q4 2022.
New Protocol Fee Model
Alongside improvements to the design and utility of the TRU token, we also propose a new model for protocol fees that is fair, transparent, and competitive with offerings in traditional finance.
TrueFi will collect an annualized fee of 50 BPS (0.5%) on each dollar stored in active TrueFi portfolios
In this design, fees accrued by a portfolio for a single day of usage would cost lenders 0.0013% (0.5% divided by 365 days). This change is in direct response to feedback from lenders and portfolio managers, and it offers the following benefits:
- The fee is proportional to usage of the protocol, compared to TrueFi’s previous flat fee. Fees are not incurred during the capital formation period.
- Accounting is simplified, and books no longer reflect a sudden drop in asset value (as incurred by TrueFi’s flat fee) on the first or last day of the portfolio’s term.
- Funds can move through TrueFi opportunities without incurring additional fees, encouraging experimentation and diversification.
To get directly involved in these deliberations, join the TrueFi DAO today and explore our dedicated TRU Tokenomics channel in Discord, open to verified stkTRU holders.
Preparing TrueFi for 2023
Common crypto wisdom suggests that bull markets are prime time for growth, while bear markets are dedicated to building. TrueFi continues to see high borrower demand, and with upcoming features designed to unblock both DeFi and traditional institutional participation, TrueFi remains committed to pushing on both fronts.
With all to be designed and built, the input of TrueFi’s community is more important than ever. You can join the discussion of this roadmap update in our Discord and on the forum, and get an intro to our broader governance workflow here. If you’d prefer to delegate your voting power to a trusted representative, you can explore TrueFi’s various delegates and complete delegation on Tally.
Still new to TrueFi? Learn about our institutional approach from CIO Bill Wolf on the Forward Guidance podcast, or get a broad intro to TrueFi on YouTube or our blog.
