Credit Delegation is a feature of Aave which allows a Credit Delegator to delegate the credit of their account’s position to a Borrower. This newly implemented feature presents an interesting opportunity for TrueFi to be the Borrower in which users of Aave delegate the credit of their account’s position to.
A natural synergy between TrueFi and Aave becomes clear. TrueFi currently lacks the liquidity to fulfill many borrow requests at once while Aave users lack the ability to vet borrowers securely and mitigate the risk of default. By utilizing the sea of liquidity on Aaave, TrueFi can focus on delegating capital efficiently and providing a legal framework for enforcing action against delinquent loans.
I believe credit delegation will be an increasingly important sector of DeFi going forward and by failing to integrate with Aave, TrueFi risks losing market share to future competitors that utilize the Aave credit delegation feature to have access to potentially hundreds of millions of dollars of liquidity.
These are just my preliminary thoughts, would love to discuss!
Hey @RyanRam thanks for sharing this idea! It has indeed been on our mind but wondering how you’d solve for the following…
if the protocol is in dire need of liquidity (prolonged liquidity shortage, for whatever reason) and the supply APY is not high enough to satisfy the liquidity providers, some stable rate loans might undergo a procedure called rebalancing. `
If an user’s loan was taken at a stable rate that is too low for the current market conditions, the protocol might decide to move the stable rate to the current (higher) one to provide a more competitive supply rate for depositors. Eventually, as the market situation normalises, the user will be rebalanced back down to a more appropriate stable rate. The current condition to rebalance is the following: a stable rate loan can be rebalanced if the stable borrow APR accrued by the loan is lower than the current supply APY.
TLDR - IMO. There is a ton of market risk to be managed in the setup you’ve described. As TrueFi grows and more folks in the market look to borrow TUSD or other pool assets in the future, this would inevitably increase the borrow rate for said asset, at a detriment to the protocol.
Oh wow, I did not know stable rates on Aave can be rebalanced. That definitely presents some unique challenges. I wonder if that risk can be passed on to borrowers?
In this scenario a borrower on TrueFi could choose which source of liquidity they tap for their loan.
Aave Liquidty
Variable Rate
Stable Rate
Lower rates but could be subject to unstable rate changes and rebalances.
As it stands now, lenders still lack the ability to find and trust borrowers they don’t know. Additionally I imagine a large portion of lenders on Aave are “small fish” with not much credit to delegate, by delegating to TrueFi their collateral can be pooled with the collateral of others.
TrueFi would be adding value by connecting lenders to borrowers, assessing the creditworthiness of borrowers, and mitigating risk by going after borrowers that default. Add a small fee for the service and I think many on Aave would jump on that opportunity.
