TrueFi Lines of Credit (also referred to as Automated Lines of Credit or "ALOCs”)are lending pools for a single borrower, where the interest rate paid by borrowers is determined by a configurable interest rate curve.
Example of Automated Line of Credit portfolio
Why use TrueFi Lines of Credit?
TrueFi Lines of Credit provide borrowers a flexible way to raise capital and lenders a way to deploy capital while maintaining high liquidity.
TrueFi Lines of Credit use supply and demand dynamics to set interest rates, giving lenders incentive to supply capital to pools above target utilization rates and borrowers incentive to maintain optimal liquidity ratios in each pool.
How are interest rates determined?
It’s generally (but not always) the case that as utilization increases, the interest rate increases (but not past a ceiling interest rate, chosen by the borrower) and as utilization decreases, the interest rate decreases (but not past a floor interest rate, chosen by the borrower)
From the borrower’s perspective: Borrower expresses that they are willing to borrow between [x]% and [y]%, with an ideal utilization rate of % so that some amount of instant liquidity is available to lenders.
From the lender’s perspective: Lenders want to deploy capital to loan opportunities without losing the ability to withdraw funds when needed. In return, lenders earn a dynamic rate based on the pool utilization and interest rate curve configuration.
How are TrueFi Lines of Credit created?
Borrowers work with TrueFi DAO governance to create a line of credit. This should be done as a standard proposal to TrueFi DAO describing all the parameters involved in the proposal. It is a 2 step process.
Once a Line of Credit is created, lenders can put funds into the pool if they meet the lender restriction requirements that have been configured (whether permissionless or permissioned pools).
Lenders can withdraw from the portfolio’s available idle funds at any time. As lenders enter or exit the portfolio, the utilization of the portfolio changes, and thus, the lender APY changes as the interest rate paid by the borrower changes.
When a lender withdraws, they pay protocol fees (50 bps) to TrueFi protocol treasury.
What are the fees on Lines of Credit?
Lenders to Lines of Credit pay a standard protocol fee of 50 bps (0.50%) per annum to the TrueFi DAO treasury. Fees accrue block-by-block, meaning that if a lender puts 10,000 USDC into a line of credit for 30 days, the lender would accrue a protocol fee of ~4 USDC over the course of 30 days.
Protocol Fee example
Linda puts 10,000 USDC into a line of credit for 30 days, where protocol fee = 50 bps per annum.
Assuming the value of Linda's principal grows linearly to 10,100 USDC during this time period (thus, her avg. position value = 10,500 USDC), Linda would accrue and pay a protocol fee of 4.32 USDC over the course of 30 days:
How does borrowing from a TrueFi Line of Credit work?
Once a line of credit has been created, borrowers can withdraw idle funds at any time before the pool's endDate. After the end date, deposit and borrow actions within the line of credit are disabled, and borrower must repay all principal and interest accrued.
How is interest accrued?
Interest owed by the borrower is accrued block-by-block. Similarly, lenders accrue interest each block as the pool value increases (pool value = principal + interest accrued).
Note that for borrowers, interest owed is calculated upon the principal borrowed (i.e. interest amount is not compounded, borrower does not “pay interest on interest”).