Unsecured Loan TrueFi, how to connect the real world with the DeFi world?

Source: Block Rhythm

According to data from OKLink, the total amount of DeFi collateralized loans has reached $25.3 billion, and behind this massive borrowing amount is collateral that far exceeds it. Over-collateralized loans have long become the common paradigm of DeFi lending. Maker, AAVE, Compound… a variety of over-collateralized loan protocols provide different collateral services, with collateral ratios even reaching as high as 800%. However, this also brings a confusion to users: If I already have money, why do I still need to take out a loan?

In the off-chain world, credit loans are the more widely encountered form of loans. Compared to collateralized loans, credit loans do not require collateral, which can truly solve the urgent needs of those in need of funds. But in the DeFi world, due to the characteristics of trustlessness, permissionlessness, and lack of KYC, it is difficult for DeFi developers to constrain borrowers through off-chain behavior. TrueFi combines the on-chain world with the real world, which may solve this problem.

TrueFi is an uncollateralized lending protocol developed by TrustToken, launched in November 2020. TrustToken previously developed five fiat-backed stablecoins (including USD, GBP, AUD, CAD, and HKD). On August 5, TrustToken announced that it had raised $12.5 million in funding, led by Blocktower, with participation from a16z and Alameda. The team stated that they have gradually moved TrueFi towards decentralization, and ultimately the protocol will be handed over to the community.

On-chain Financial Activities Protected by Off-chain Legal Frameworks

When borrowing on TrueFi, three stakeholders are involved. Lenders lend stablecoins to the TrueFi loan pool, providing funds for loans while earning returns; in addition to loan interest, lenders can also earn TRU token rewards. The process of fund lending is completely transparent. TRU holders can participate in protocol governance and vote to approve each loan request.

Will the community's approval of each loan, especially credit loans, bring risks? Yes, the on-chain world cannot audit the borrowers in the real world, so TrueFi introduces off-chain mechanisms. Unlike most trustless DeFi lending, TrueFi borrowers must undergo a review of their loan applications before they can be submitted on-chain, and every loan seen by the community has already been vetted by the TrueFi team. After being presented to the community, TRU stakers collectively assess the creditworthiness of the borrower and individual loan applications.

Currently, TrueFi only accepts institutional borrowers, who must complete KYC verification before borrowing, followed by a credit review by TrueFi. In the off-chain credit review, borrowers must provide various information such as social media links, annual income, assets, trading/investment strategies, intended use of funds, and business history. Only after passing the credit review can they enter the on-chain process. Typically, the platform requires that the borrower's liquid assets or available liquidity be more than 10-15 times the total loan amount requested.

（TrueFi Loan List）

Once in the on-chain phase, users participating in TRU staking can engage in governance and vote on loans. Stakers can vote in favor or against loan applications. If at least 15 million votes are cast and 80% of the votes are in favor, the loan will be approved.

（Detailed information and credit scores for each loan can be found）

To encourage user participation in governance, TrueFi has also designed a voting incentive mechanism. All users participating in voting can receive rewards distributed in TRU, which can be claimed after the borrower withdraws the loan. The reward mechanism follows the formula:

TRU Reward = (Interest * TRU Distribution Coefficient * Multiplier)

Interest = (Loan Annual Interest Rate * Days * Principal) / 365

TRU Distribution Coefficient = (Remaining TRU in the distribution pool) / (Total TRU allocated to the distribution pool)

Before the loan pool can provide funds for loans, it must go through a "minimum voting period," which varies for each loan. This mechanism prevents borrowers from quickly obtaining loans, allowing ample time for community approval. The voting for loan applications does not have a specific deadline and will continue until the vote is approved or the borrower actively cancels it. Before the vote is approved, stakers can modify or cancel their votes multiple times.

Based on the ratio of YES to NO votes for each loan, TrueFi can assess the overall risk of the loan pool, and this data can serve as a reference for the risk coefficient of the entire loan pool. Once a loan application is approved by the community, the borrower must sign a separate loan agreement before receiving the loan principal, thereby binding the borrower within a legal framework.

Members of the TrueFi community must be cautious in approving each loan, as it relates to their financial security. If a loan cannot be recovered, all users who participated in voting will face the risk of having their staked TRU liquidated. The platform will liquidate up to 10% of the TRU collateral of voting users while initiating legal action against the defaulter.

Once this series of processes is completed, borrowers can withdraw their stablecoins, and lenders' funds begin to accrue interest and earn returns.

The total supply of TRU is 1.45 billion tokens, and TrueFi promises not to take any measures to increase the supply. Of this, 39% is distributed through mining rewards, 28.5% through private sales, 18.5% belongs to the TrueFi team, 9.5% is owned by the company, and 4.5% is reserved for future teams.

TrueFi's Risk Mitigation Strategies

Since November 2020, TrueFi has issued 56 loans, with a total borrowing principal of $420 million and an average APR of 10%. Among these, 36 loans have been repaid, with an average borrowing period of 70 days. These loans have a total principal of $180 million, earning users $2.86 million in interest. Among these borrowing institutions, it is not difficult to see the names of well-known institutions such as Amber Group and Alameda Research. To date, there have been no debt defaults.

The first loan from TrueFi was borrowed by Alameda Research, whose CEO Sam Bankman-Fried stated: "As the first borrower of TrueFi, Alameda is proud to be an investor behind the team and technology. We see the growth of TrueFi's uncollateralized loans far exceeding the crypto space, and we plan to be partners and users at every stage of the protocol's growth."

Currently, TrueFi is perfecting a whitelist of vetted borrowers, and in the future, new borrowers may be added to the whitelist based on community-established standards through community governance. If a borrower defaults, legal recourse will be handled by TrueTrading, a subsidiary of TrustToken, Inc. As TrueFi gradually decentralizes, this institution may be replaced by another non-profit entity. Additionally, considering the risk of protocol attacks, TrueFi has partnered with Nexus Mutual to launch smart contract insurance to protect lenders' funds.

Undoubtedly, in the DeFi market where collateralized lending is widely adopted, uncollateralized credit loans bring some innovations to the market. This also tightens the connection between the DeFi world and the real world, gradually intertwining DeFi with traditional finance. In the model designed by TrueFi—on-chain fundraising ------ off-chain lending ------ legal framework protecting debts—the boundaries between DeFi and TradFi are becoming increasingly blurred. The changes brought about by this model raise the question: has DeFi entered the off-chain real world, or has TradFi adopted crypto assets for settlement?