[Proposal] Growing Borrower Activity with TRU Incentives

Proposal:
Provide TRU rewards to borrowers in order to increase borrower activity on TrueFi, while maintaining high lender APYs and cultivating “loyalty.”

Background:
Though TrueFi has recently hit the $100m loans originated milestone, the rate of growth for new loans has slowed. It’s clear from borrower conversations that demand for new loans has reduced proportionally to the rise in interest rates.

As borrower activity is key to TrueFi’s short term (APYs) and long term (defensive moat) health, this proposal aims to incentivize new borrower applications and make our loans more attractive to existing borrowers.

Proposal: Borrower TRU Incentives
The following proposal aims to increase new borrower applications and new loan applications for existing borrowers while maintaining high lender APYs, and cultivating “loyalty” (through TRU token holdings & repayment histories) among borrowers.

This proposal requests 1m TRU from the TrueFi incentive pool to be allocated to borrowers who borrow the next $100m on TrueFi [see current TRU token allocations here]. Details below:

  • This incentive program is open to any new or existing borrowers.
  • Under this program, borrowers will receive incentives equal to 1% (100 basis points) of the principal loan amount. For example: $1mm loan would receive 10,000 TRU.
  • TRU Incentive on any one loan cannot exceed a maximum of 40,000 TRU ($4mm principal loan amount).
  • TRU Incentive is sent to the Borrower only upon successful loan repayment.
  • TRU Incentive program will end at the earlier of the next $100mm in funded loans (1mm TRU) or September 30th, 2021.
  • TRU Incentive program subject to early termination if the total ‘cost of debt’ net of TRU incentive is deemed too low based on prevailing market rates.
  • If approved, borrower incentives begin on approximately May 20th - at the same time [origination fees are slated to end].

Pros:

  • New/more lending activity: Lower rates will certainly help convert new borrowers to apply for whitelisting on TrueFi, as well as give us a tool to bring back existing borrowers who have refused new loans under current terms.
  • Attractive rates for borrowers and lenders: These incentives will help us convert more borrowers without directly reducing the rates of return enjoyed by lenders.
  • Incentive Alignment: Borrowers holding TRU make them invested in our success, possibly to the degree that they participate in TRU token markets or governance. Our borrowers holding TRU is also good optically.
  • Credit model becomes more valuable: Every loan is captured by TrueFi’s V1 credit model, which incorporates past TrueFi loan repayment activity. For borrowers, a robust TrueFi repayment history means better loan terms, which in turn means a greater likelihood of future borrowing - thus functioning as a sort of “loyalty” incentive.
  • Circulating TRU supply: This incentive would release only 1m TRU into the circulating supply over ~4 months, representing approximately 0.2% of the total incentive pool. See TRU treasury dashboard for details.

Considerations Regarding Borrowing on TrueFi:

  • Rising lending rates: Borrowing rates have risen almost 500 basis points in the last 3 months.
  • Higher DD friction: The new credit model process has increased the due diligence performed on borrowers, increasing some of the friction of signing up as a borrower (but making for arguably “safer” loans).
  • Below-Target Utilization: TUSD in the lending pool is currently sitting around 50% utilization, on a target of 70%. With new assets being added soon (~May 20th, V3 launch), TrueFi needs more loan requests to nurture a healthy marketplace.
  • Borrower Alternatives: TrueFi’s standard borrowers typically have access to a handful of other sources of funds, such as exchanges (which give lines of credit for little to no cost). At current rates, the “cost” (financial + time cost) of TrueFi is less competitive with other alternative sources of funding.

Lower utilization has the effect of forcing more loanable assets into Curve, lowering overall lender ROI, and undermining the growth of TrueFi. Building a healthy double-sided borrower/lender market is especially important now that more competitors are starting to enter the market.

At its core, TrueFi is a two-sided marketplace of lenders and borrowers - and a healthy, long-lasting relationship with borrowers is what really makes the platform valuable and defensible. Especially this early into the growth of the protocol and the on-chain credit sector as a whole, every single loan is valuable to building the strongest possible marketplace.

It’s for that reason we believe TRU incentives for borrowers aren’t just good for borrowers, but for lenders and TRU holders alike - and an integral part of moving towards larger, more regular loans as well as a robust, industry-accepted on-chain credit score built on TrueFi activity.

With that, would love to discuss this proposal further, and encourage you to vote:

VOTE:

  • YES, I support allotting 1m community TRU to this borrower incentive program
  • NO, I oppose the borrower incentive program

0 voters

I support this, but the structure seems a little strange.

  • Tying it to the principal loan amount rather than [loan amount * duration] incentives shorter loans. Is this what we want? It seems that if we are having a hard time getting utilization up, then locking in more long term loans when able is to our advantage.
  • Why the 40,000 TRU limit? I’d love to see some larger loans from borrowers who have built up some trust, and I feel like this will unnecessarily discourage those.
  • What does this mean: “TRU Incentive program subject to early termination if the total ‘cost of debt’ net of TRU incentive is deemed too low based on prevailing market rates.”
1 Like

If someone is borrowing money from us at 16% interest, they better have a really good use for that money. In which case, they ought to sell any TRU they receive and use it for whatever purpose they took the loan for. This would put negative pressure on TRU price and be no better an incentive than just lowering interest rates 1%.

In fact, I would be concerned if our lenders weren’t selling their TRU. I have doubts about anyone who effectively takes out a 16% interest loan to buy TRU tokens.

2 Likes

Hi Benjamin, great questions–

Duration: Actually at the moment for the safety of the protocol and to build repayment history/trust we’ve been leaning towards shorter term loans for now. Regardless, because the borrowers are in many cases unwinding positions to repay they still prefer longer term loans. Of course, the hope is for this incentive program to drive utilization.

TRU Limit: One of our focus points in managing our loan portfolio risk is observing single borrower exposure limits as our credit analysis (via our credit model) continues to be refined. Currently, most of our loans will be limited in size such that the TRU incentive may not exceed 40,000 anyways. As we really hope to bring in new borrowers with this incentive they would certainly be limited on loan size until they’ve developed credit history with us. Further, we’d like to see that the incentive be spread across as many new borrowers as possible to continue to diversify our borrower base. If there is a desire to increase this TRU incentive beyond the 40k cap per loan down the road then certainly we can circle back to this and reevaluate.

Early Termination: This simply means that if the interest rate on new loans drops to a level at which it’s no longer necessary to offer the incentive then we have the ability to terminate this program.

2 Likes

Thanks for the explanations; I’m now comfortable voting in favor as it stands.

1 Like

Sure, thanks Benjamin. Over the years, I’ve had the opportunity to participate on teams that built portfolios of proprietary debt products and the common thread across the successful books were those that had counterparties that continued to stay with the institution because the relationship was constructive and mutually beneficial. Our borrowers are highly intelligent, savvy and tremendously helpful in originating new business for the protocol; as such, maintaining a long-term partnership with them will be critical to scaling our TrueFi loan portfolio.

2 Likes

Thanks for the proposal Roshan. I support this as an initiative to regain the momentum we lost in borrowers activity but wouldnt want this to become a long term necessary workaround to justify having high enough APYs to keep our lenders happy. This seems to be the case in your proposal, so i fully support this.

@rattlecage I wouldnt worry about the selling pressure. We average approx 20M TRU traded on a daily basis and here we are talking about 1M TRU awarded over 120 days. On a daily basis this is 8k TRU over 20M traded, or 0.04% of the daily volume.

On another note, @RDharia , what do you think about a referral program for our borrowers, where when bringing new borrowers, you would get either 1) additional TRU, or 2) a small % of the APRs the new borrowers are paying, for their first x loans, or 3) a combination of those ?

2 Likes

The community should accept lower APRs if there’s more competitive rates elsewhere. Convoluting the repayment price of a loan with token incentives seems to make things needlessly complicated for borrowers working out the cost of a loan, and for lenders.

5 Likes

I completely agree with deif here, instead of diluting the TRU token in this manner, the stakeholders should just accept 1% lower APRs for the loans.

As a sidenote, if we really want to involve the TRU tokenomics in incentivizing borrowing, it should be done in a way that is beneficial for the parties with long term interest in the protocol. An example would be: borrower gets a 1% APR discount on the loan if they burn TRU for 0.5% of the loan value giving an effective ~0.5% discount.

3 Likes

I second this, is there a strong argument against the community agreeing to lend out capital for cheaper to stay competitive, rather than a TRU token incentive structure?

I think the only argument I can think of is the one put forth by @RDharia, where putting TRU tokens in the hands of partners rewards them with equity which ideally aligns them with the interests of the platform in the long-term.

1 Like

Right now, i am leaning towards a YES on this proposal, but it’s not a strong yes.

If I were a borrower, there is currently no incentive to hold the airdropped tokens and I would like to hear from a borrower first as to whether they would prefer lower APRs or governance tokens. I’d certainly be raising my eyebrows at a project that stated “I know the APR is higher than what you’re used to, but we’re going to give you these cool LP tokens that you can instantly market sell to offset it.”

1 Like

Yes, my view is that our base interest rate should reflect as accurately as possible the cost of capital to borrow on an unsecured basis (lenders’ required rate of return/yield). We’re establishing a benchmark as a protocol that others will look to as a comp rate somewhere between secured lending and equity returns. I believe that artificially manipulating this rate for business development reasons sets a difficult precedent particularly when we’re having direct discussions with borrowers and we’re being constantly challenged over our cost. If our base interest rate changes it should be transparent that the market perceives the yield does not accurately reflect the cost of lending sans collateral.

3 Likes

Both of you make good points here. Yes, borrowers being airdropped these tokens as an incentive will sell these to lock in the realized savings on cost of borrowing.

However, as @RDharia says, the borrowing cost should reflect the market rate for cost of capital (a benchmark rate products compare themselves off similar to LIBOR/SOFR) and directly manipulating this rate for CAC can be very confusing. With this model, we are being very clear with “Hey this is the market rate for borrowing, BUT because we want to encourage lending on our platform, here is a TRU subsidy to make it more appealing for you to borrow with us”, rather than the alternative which could be seen as more opaque/confusing “We as a community are artificially manipulating our borrowing rate to encourage lending on our platform”

1 Like

You say you raise your eyebrows at this, but is this not how any early stage business works? Yes of course, your business should in the long run, be a better alternative to the incumbents, but at the early stages, you are spending capital(via diluting equity) to encourage borrowing to grow so that when you become as large as the incumbents, TrueFi will no longer need such extensive subsidies to prove the value of their lending product. I think we as TRU token holders need to accept dilution of our equity in the short term to ensure the platform can grow to the size it needs to for the long term benefit of TRU holders. We are still too early to be considering anything that discourages lenders/borrowers on our platform for the sake of equity holders.

1 Like

I fail to see how dropping borrowing rates to be more competitive is seen as artificially manipulating the rates. This is simply supply vs demand or am I missing something? If borrowers are put off from borrowing at the rates provided then that is clearly not the correct market rate.

Now if the lenders want their returns boosted then you should incentivise lending and not borrowing. After all, it is the lenders that have the incentive to see the platform succeed, not the borrowers.

1 Like

I did not formulate my thoughts correctly and probably should not have used the word “artificially manipulating”, more that separating borrower incentives from the market rate aligns with the protocol in the long term.

The team has already stated that they intend to have the protocol automatically set lending rates based on the market rate (how this will happen I do not know, perhaps polling from margin lending USDT rates from exchanges).

So to continue down this path of the community ad-hoc setting rates I don’t think aligns with where the project is going. We need to let the protocol decide the market rate for lending, and any incentives we provide to encourage lending/borrowing should be SEPARATE from this protocol market rate. I would also say to your point about lenders, we are inherently subsidizing lenders by maintaining their yield in spite of customer acquisition costs.

Sell pressure is only half the issue. There is no advantage to this proposal over lowering rates 1% if people sell. Any competent borrower sells and doesn’t care about the future of Truefi, which is fine. Borrowers are here to borrow money and we should not expect them to be invested in the platform.

If we want to lower rates, we should lower rates. Thats going to attract borrowers better than giving them tokens they have to sell and forcing them to deal with additional gas fees or slippage. It would also be simpler and easier to track.

1 Like

I disagree with this, I doubt TrueFi borrower/lenders are as short-sighted as you make them out to be. Most borrowers and lenders do care about the future of this platform. We are still so early in the lifespan of this product, I would be surprised if most borrowers are making decisions to use TrueFi as a way to save a few bps off their borrowing costs.

Of course they take it into account for daily business operations, but by using the platform/earning equity, they are ultimately making an investment decision. The appeal of TrueFi is not just lower borrowing costs, it is ideally a future where borrowers can access a reasonably priced source of undercollateralized credit not from a centralized financial institution. A future where entities that would not be able to obtain competitive borrowing rates from centralized institutions can rely on TrueFi as a relatively decentralized and more transparent source of credit.

If they did not care about the future of this platform, they would not be using it as they have, given TrueFi’s limitations in its current state. We need them to help grow the product and shape it around their feedback and needs. They may be selling their equity rewards to reap the borrowing cost benefits, but that does not mean they are not invested in the future of the platform.

2 Likes

Snapshot voting is live for this proposal:
https://snapshot.org/#/truefigov.eth/proposal/QmZy3h7hA3Qbzx9bCrzTmBir8yiVnQazucAnQVWj1piZa5