Get borrowers more involved in and invested in the success of the protocol
More usage and utility for TRU
Increases protocol TVL and utilization (in a safer way)
With our new credit model, we’re taking steps in the right direction of systematizing how we set credit limits for our borrowers. Most of our borrowers would like higher credit limits and we’d like to do this for them, but don’t have a safe way to do this without going past our comfort limits when it comes to risk.
One way we could do this is by allowing borrowers to collateralize their loans above the limits that we’re comfortable extending without collateral.
As an example:
BORROWER_1 has a credit limit of $2,000,000. This means that we are okay with extending them a $2,000,000 loan without collateral.
We wouldn’t want to go beyond 2mm without collateral, but we might be willing to go up to 3mm if they were willing to post 5-6mm worth of collateral…
This is a way to scale up growth in a way that we are comfortable with while also giving more utility to TRU and getting our borrowers more involved in the protocol.
How I envision this working:
If a borrower wants to go beyond the unsecured credit limit we assign them, they’d be able to post collateral for the amount above our unsecured limit that would be locked on-chain for the duration of their loan.
Example Tiers (numbers below are examples for the purpose of explanation):
If a borrower stakes:
250,000 - 1,000,000 TRU: Can borrow up to an additional 500,000 at 50% LTV.
1,000,000 - 5,000,000 TRU: Can borrow up to an additional $2,500,000 at 50% LTV and receive 1% discount on rates
5,000,000 - 10,000,000 TRU: Can borrow up to an additional $5,000,000 at 50% LTV and receive 1.5% discount on rates
'>10,000,000 TRU: Can borrow up to an additional $10,000,000 at 50% LTV and receive 2% discount on rates
In the above example, even if the borrower did not want to borrow more at the 50% LTV, they’d still be able to have the discount on rates. E.g., if BORROWER_2 has a 10mm unsecured credit limit and only needed to borrow 10mm then they could still have the 2% discount on their unsecured amount if they were staking >10mm TRU.
I don’t believe this at all takes away from the value of unsecured lending (we are very much still doing that), but now we’re expanding our offerings to be able to more scalable grow our borrower pool.
Allow Borrowers to Stake TRU to increase credit limits?
I really like this idea because this can potentially create buy pressure for TRU and make our borrowers more invested in our platform. If this leads to a higher TRU price, then it means better lending APY, better default protection and hence more lenders. This can also encourage more people to stake which again leads to more default protection. As much as I don’t want to delve into TRU price, I think it’s important for TRU to have a much higher value to have this amazing positive cycle. I’m in support of anything that creates more buy pressure which we don’t have currently.
To clarify, in the case of a default are you saying that instead of slashing up to 10% of all staked TRU, the protocol would firstly slash the borrowers TRU collateral first before the rest of the staking pool is hit?
This proposal has my full support. Beyond the obvious benefits for the token, this will allow us to scale and lead to captive borrowers. Thank you Ryan for putting this together and doing the loom (very efficient).
Good question. I agree the borrower’s staked TRU should be slashed before any other stakers are affected. I think we could implement this near-term via loan agreements, rather than via smart contract. Thoughts @ryan.rodenbaugh@tim.welsh ?
As someone with both cash in the lending pool and a TRU staker obviously I’d love if borrowers took out larger loans and also bought TRU but I’d like to get borrowers perspective as to how likely they are to make use of this. It does seem like it would provide a good incentive for borrowers to hold/stake TRU they receive as rewards.
It would be great but there shall be limitation for new borrowers. For old borrowers, increasing their credit limit via staking is fine. For new borrowers, the risk is still unsure and we shall limit their highest tier to control risk no matter how many TRU they staked.
these were numbers that I gave a bit of thought too (and actually I don’t think are too bad), but do you have more thoughts on this @RDharia if we were to move this to a formal proposal next week?
BTW - The one confusing detail in this post is that I make reference to 50% LTV, but also make reference to 200% LTV in the way I describe loan amounts.
To begin, for the safety of lenders, I think we want to start at 50% LTV.
I’ll make some updates to the post so that this is better reflected. It certainly will be possible to increase LTV over time, but since I believe it would be much harder to decrease it, I believe starting with a lower LTV, validating it works, and increasing over time, is best for the safety of the protocol.
Just another consideration…With other protocols, borrowers are incentivized to invest in the lender’s token to create some benefit for themselves ( lower borrowing rates vs. the increased limit being proposed here). In either case, it creates a spike in demand for the token at some given point ( right before submitting proposal vs. payment date approaching ). In a scenario where there is limited liquidity, this creates ridiculous volatility that undermines the credibility of the protocol rather than the healthy appreciation desired. It also requires the protocol to pump liquidity into the system to maintain some sort of normal functionality. The price appreciation evaporate as soon as the liquidity is absorbed and the demand returns to normal. In the end, it’s difficult to quantify what was actually achieved. I know there is a best practice out there, but I am not aware of what it is. As TrueFi matures, and assuming it meets everybody’s expectations, liquidity will resolve this issue.
This proposal is very good, and the time level of borrowing can also be divided according to the TRU mortgaged.
250,000-1,000,000 TRU: Can borrow up to an additional $2,000,000 at 50% LTV. (60 days)
1,000,000-5,000,000 TRU: Can borrow up to an additional $4,000,000 at 50% LTV and receive 1% discount on rates (90 days)
5,000,000-10,000,000 TRU: Can borrow up to an additional $7,000,000 at 50% LTV and receive 1.5% discount on rates (120 days)
'>10,000,000 TRU: Can borrow up to an additional $10,000,000 at 50% LTV and receive 2% discount on rates (180 days)
Other unsecured TRU can only apply for 30 days