[Ideas] Designing the TrueFi Backstop Fund

[Backstop/Insurance/SAFU – whatever you want to call it]

Based off conversation in the forum (see post from Kia), in a recent blog post, the TrustToken team shared that they will

“contribute 10% of our company tokens from Unlock 1 into a pool specifically to create a SAFU-like/insurance fund/system backstop, one designed to incentivize more lenders. It’s still TBD the structure that this will take and we’ll be engaging the community for proposals of how this could ultimately be self-sustaining.”

Now, here I am engaging the community for proposals of how this could ultimately be self-sustaining :slight_smile:

Some ideas/comments/observations to get the discussion started:

  • I believe we want the insurance pool to be comprised of assets besides just $TRU
  • I believe we want the backstop fund to be self-sustaining
  • It would be interesting if the backstop fund could grow by yield farming/earning yield, either in TrueFi or other protocols
  • I’m interested in DerivaDEX’s insurance mining program (Blog Post 1, Blog Post 2, Docs) to bootstrap the protocol’s insurance fund. As of writing, they have $40.6mm USD staked. As I understand, people stake USD-assets, earn DDX token for 1 year and if in the span of 1-year there is a big liquidation, the USD-assets would be drawn down. But after 1-year, presumably these people will unstake and then the DerivaDEX insurance fund capitalization needs to come from other places (in their case: liquidations and fees)? DerivaDEX’s governance could extend the staking rewards past 1-year and then the insurance mining could continue.
    • Given how many unallocated incentives we have for TRU (on the low end, 13mm… on the high end: 65mm) this is a possibility for us too
    • Staked USD assets could leverage Yearn Vaults + (Coverage from NXM/Cover) for yield, insurance fund retains accrued yield which then acts as “PCV” or Protocol Controlled Value.
  • Could you stake TRU/ETH LP tokens in the backstop fund so that users are both providing liquidity and offering a backstop (which is farming TRU)
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I would suggest making the backstop level dynamic based on the risk profile of the overall portfolio (maybe utilizing a few key parameters). As the company advances over time and credit analysis becomes more robust, the need for an over-funded backstop may begin to feel like a draconian use of resources (self-sustaining or otherwise). Just a thought.

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I like MakerDAO’s System Surplus Buffer as an inspiration for TrueFi’s backstop fund design.

One simple self-sustaining structure could be:

  • [ y ]% of protocol fees earned (earned in tfTUSD or TUSD) are sent to the backstop fund
  • once backstop fund value reaches >= $[ x ], then all fees earned go to TRU stakers
  • governance can vote to send backstop funds to the lending pool or other recipient(s) in an adverse event
  • as the protocol grows, governance can decide to adjust the amount held in the backstop fund and/or the % of protocol fees diverted into the fund

I see the backstop fund as a failsafe to protect lenders, above and beyond the protection TRU staking provides. For this reason, I think the backstop fund should be very conservative. I could be swayed though – I’m just not as familiar with the insurance mining model.

Alpha Homora also has a similar reserve model:

10% of borrower’s interest will be stored in Alpha Homora Bank Reserves, which can be used as an insurance fund for lenders in case of unexpected scenarios.

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The loans are given in TUSD right?

It would be nice to see some amount of the SAFU fund held in TUSD (as a stablecoin the value is assured) and some amount held in TRU (more locked tokens helps increase value). The TUSD can be yield farmed in a stablecoin pair that doesn’t have high risk of impermanent loss and has high liquidity so that it is readily available in the case of a default.

I see that staking TFI-LP could be interesting, a concept that parallels traditional finance would be tranches of liquidity providers. Instead of a new way to stake TFI-LP, just take the APY that is earned by the loan interest and allow liquidity providers to choose a higher risk tranche with higher APY (first to be slashed in the case of a default) and lower risk tranche with lower APY. I think this may achieve similar design goals and it is easier to approach for those coming from traditional finance

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I love this idea. I would say, stay away from TRU/TUSD. Trusttoken obviously has plenty of their own assets and they need to protect themselves from TRU/TUSD failure. Right now, I would say either, curve TUSD (Curve.fi) or aave TUSD, with a leveraged carry trade (ie. borrow TUSD, swap to sUSD lend at higher rates). But honestly I like the idea of hedging entirely away from the dollar (synthetix forex, trusttoken FX basket.

At the end of the day, this fund should be designed specifically for TruFi’s usage. This could mean talking to curve, snx, aave, balancer about creating a specialized fund.

Maybe even when balencer v2 comes out, the trusttoken fx basket could be merged with yield farming strategies to hedge away from dollar risk.

No matter what happens, people are gonna ask why Tru is a hedge fund, but that is exactly what insurance is. I would love to hear what the community has to say.

One other product I find interesting (but not sure exactly how it fits here) is China’s Ant Financial/Alipay’s Xiang Hu Bao health insurance product. You can read more about it here (just do a cntrl+F for “Xianghubao”, but the TL/DR is:

It’s a mutual aid health insurance product that requires no upfront payments or premiums. However, whenever a claim is submitted by someone, all the other users of Xianghubao will pay their approved claims. Per S1:

“If the claim is approved, the participant will receive a one-time payout, the cost of which is shared equally by all other participants. In 2019, the average annual contribution made by each Xianghubao participant to cover claims was RMB29 ($4).”

Per insurance journal

Given the growing user base, every member should pay no more than 0.1 ($0.015) yuan for every critically ill person, according to Ant. It covers a list of no more than 100 ailments. If a dispute over claims arises, a jury consisting of hundreds of thousands of pre-approved users will vote on whether to pay out compensation.

One of the reason that it’s so cheap for users of this product is that there are 100mm+ people contributing. We are not there yet, but food for thought :slight_smile:

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I think the important thing is to highlight the SAFU has $X TUSD in it that is available to provide security in the event of a default.

The design goal should be to help liquidity providers understand how much financial buffer there is in the event of a default. After all, providing liquidity for uncollateralized lending is highly risky and designing a SAFU correctly will help LPs feel more comfortable putting in higher amounts of capital (raising TVL and likely TRU price).

What happens behind the scenes if the TUSD is put into yield farming via Curve or AAVE or a more complicated financial instrument should all be fine assuming that financial vehicle can be quickly liquidated with low slippage in the event of a loan default.

I can agree there is merit in staying away from TRU in a SAFU because TRU value will likely fall in the event of a loan default.

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Well, I am not sure where this can be done, but taking a short position on TRU on a CEX or DEFI can make big money in event of a default.

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Also, some ideas in this blog post that @hal shared with me earlier. (How to Structure a Protocol's Tr… — Mirror) Even though this blog post is about treasuries, some of the same principles can be applied to insurance fund

Specifically:

Index Coop is a good case study. They recently published a thoughtful treasury report and made a proposal to purchase ETH with INDEX and DPI in its treasury. Index aims to implement a smart treasury at Balancer with INDEX / ETH at 80/20.

and

Set up yield delegation vaults: i.e. pay the protocol’s tokens (e.g. UNI) to Yearn users for them to delegate a portion of their yield in ETH and stablecoins to the protocol treasury. Rally experimented with yield delegation vaults.

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“It would be interesting if the backstop fund could grow by yield farming/earning yield, either in TrueFi or other protocols”.

Not sure about other protocols, but it might defeat the purpose of a SAFU if we put it back in TrueFi. Thoughts?

I think an interesting model could be to have 2 layers: SAFU and treasury. Fees are collected in SAFU until we reach a certain value (e.g. $1M), then additional fees collected flow into the treasury. This way we always have enough in the SAFU, but can allocate some amount to marketing, paying for development, etc. once we reach our goal amount.

Another semi-related proposal we’ve been discussing is to create traunches within the LP farms - with this system tokens deposited into the farm will be burned in case of a default, thus moving the supply of LP tokens closer to the value of assets in the pool. Users depositing LP tokens earn TRU in exchange for taking on the risk of default, those who wish to minimize default risk simply keep their LP tokens and earn the 13-16%.

This way we have 3 ways to mitigate defaults: TRU staked, SAFU funds, and LP tokens staked. TRU is always being emitted to those taking on default risk (rather than emitting TRU to those with lower risk).

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Yes, we cannot put SAFU funds back in TrueFi in the traditional sense.

As I mentioned above, we might be able to get away with holding LP tokens and burning them (for no underlying tokens) if there is a default. This way tokens are still being loaned out, earning interest, and SAFU funds increase TVL, but if there is a default, we reduce the supply of LP tokens to limit the loss of LP token holders. As opposed to simply holding collateral tokens without earning any interest.