To make this more concrete, in Bastion recent loan request, they asked for “1,000,000 for a 30 days loan at a rate of 14.5% annualized”. This means they will pay 12,083 in yield to lenders + 2,500 TUSD origination fee, meaning that the rate they’re actually paying is 17.5% (0.1749967)
(hope my math is right)
I’d like to discuss two things on this thread:
Do people agree this is a good switch to make?
What fee should be charged on the returns? My rough sense is that, to start, the fee should not be high to begin (prioritizing growth rather than fees) as we need to attract more capital to the pool. Assuming deposits in the pool continue to grow, we can discuss upping the fee at a later milestone.
Thanks @ryan.rodenbaugh. I fully support this, particularly because of your point on the headline rate!
With regards to the fee that should be charged, I also agree that we should start with a rather low fee.
My understanding is that for now we charge 0.25% regardless of the duration of the loan? That would equate to a 3% annualized fee for 30 days loans, or 1.5% for 60 days loans, 1% for 90 days…
I would suggest to start with a 1.5- 2% fee which seem to be on the low end of what is done in the market, but i am no expert, so happy to challenge this…
If the origination fee goes away and TRU stakers instead receive 2% of the loan APY, here is my understanding -
Assuming that deposits reach $50m TUSD and this amount is lent for the full year, the 2% return to TRU stakers would be $1m. There are currently about 27m TRU staked and if we assume a value of $0.50 per TRU, that means the annual return for the TRU stakers would be $1m / (27m * 0.50) = 7.4%. For comparison, stakers in the AAVE security module get 5.9% APY but can also face a maximum slashing of 30% (compared to 10% for TRU).
Naturally, as Total Value Lent (TVL) increases, the APY for TRU stakers would increase. If deposits & lending reaches $200m TUSD then the APY for TRU stakers would rise to 29.6%. It would then make sense to see TRU token value itself increase as either (1) more users will stake TRU to get yield, causing lower supply and/or (2) more users will buy TRU to stake, causing higher demand.
Now, I understand the unique differentiator of TrueFi is for 0% fully uncollateralized lending. That said, it could be interesting to explore the idea of partial collateralized lending - borrowers purchasing TRU to reduce the interest rate paid. For an analogy in the real world, real estate mortgages often allow borrowers to reduce long-term interest rate in exchange for cash up front. How this might work is a borrower uses staked TRU as collateral, and in the event of a default the borrower TRU is completely slashed before other TRU stakers get slashed. This allows borrowers to lower their interest rates by providing partial TRU collateral. Borrowers can also get governance rights on their TRU. For the protocol, this promotes decentralization as borrowers now have an incentive to buy TRU. For TRU holders, this would be positive price pressure as borrowers buy TRU, locking up more supply. It’s also more safety as borrowers now have more ‘skin in the game’ to not default. Essentially instead of 0% collateral (TrueFi) and 100+% over-collateral (AAVE), it now allows loans in the in-between 0 to 100 space. Of course this feature only makes sense for long-term / frequent borrowers so perhaps may be worth consideration with the upcoming Lines of Credit feature for trusted borrowers.
The above is a naive thought experiment and it’s worth calling out there are many gaps that are unsolved upon deeper consideration. For example, if a borrower wants to 50% collateral a loan with TRU, but then TRU value doubles during the course of their loan they’ve now effectively put 100% collateral on their loan (they’re probably still happy because their TRU collateral doubled). In converse, if TRU value halves then the loan interest rate discount would decrease until the borrower puts in more collateral. This could be a poor user experience. Also, if borrowers aren’t interested in discounts on loan interest rates in exchange for collateral, this could be a waste of valuable engineering time. Further, it can make understanding TRU + marketing that much more complex.
Love this discussion, and especially love the @rayanami idea of allowing partial collateralization with TRU. That probably deserves its own thread.
Back on the origination fee. I agree with elimination, both for transparency and for headline rates. My suggestion would be rather than a fixed APY paid to the stakers, it should be something like 10% of the loan APY. This aligns the incentives of the stakers (who will also be the loan raters) and the lenders. My worry is if it’s 1.5% or 2% fixed APY, then stakers will be tempted to approve lower APY and larger loans because they get the same origination fee, even though long-term it might cause lenders to shy away. And if we keep the loan APYs up in the 15-20% range, then the outcome is roughly the same.
Thank you for the post folks, I 100% agree with removing the origination fee in favor of a simple cut of the returns. I believe origination fees are an old model that do not make sense in this environment.
If I can add a shot in the dark suggestion if feasible via smart contract mechanism:
How about a two tier fee where if the borrower pays the in TRU, the fee can be lower, otherwise higher?
Small but can create a buying incentive additionally from borrowers.
A percentage of the APY (or APR) I think (agree above), as likely profit margins for borrowers are expanding as interest rates are expanding.
The only downside of removing the origination fee is the payment schedule for stakers. Currently, if stakers approve a loan, they receive half the origination fee up front. With a cut of returns, the fee is paid at the end.
The difference between half up front vs all the the end should absolutely not block this proposal. If there is strong support for half up front, we could even still do that under the new system - compute how much the cut of the returns will be and take half of that from the pool in advance. But unless anyone feels strongly, I would vote for simplicity for its own sake, and just reward the stakers at the end.
I vote for 10% of interest collected to be passed to stkTRU when interest is paid by a borrower.
I think it aligns incentives for lenders and stkTRU holders if the fee is earned only when a borrower successfully pays interest.
10% seems like the right number to me. While I could make a case for the % cut being higher, I think we should prioritize keeping lending pool yields high. Showing that the pool generates consistently high APY yields for lenders (even w/o TRU farm rewards) is the best way to get new users to TrueFi imo.
