Credit Vaults
What are Credit Vaults?
Credit Vaults are TrueFi smart contracts that coordinate the lending, borrowing, and management of onchain credit.
Credit Vaults enable onchain credit, helping portfolio managers (PMs) configure modular lending pools that meet their specs (single or multiple tranches, permissioned access, etc).
For a brief demo video showing their capabilities, see below:
Credit Vaults can be made up of a single tranche or multiple tranches, creating the opportunity for lenders to participate in distinct “slices” of a given vault, each with their own risk/return profile. To learn more, see #05d9 below.
Credit vaults also introduce the concept of a capital formation period, in which lenders can commit capital to a smart contract with assurances that if the vault does not meet certain requirements within a given time period, funds will be returned to lenders with no fees incurred. To learn more, seeWhat is the capital formation period? below.
How do Credit Vaults work?
For technical docs, see Credit Vault contract overview.
What types of activity do Credit Vaults support?
Credit Vaults support both onchain and off-chain "Real World Asset" ("RWA") credit activity.
PMs can use Credit Vaults to make simple fixed-yield loans to borrowers.
For PMs who want to manage more complex off-chain/RWA activities, please see Asset Vaults. Asset Vaults are specialized smart contracts that offer more flexibility to support complex off-chain use cases.
What are tranches?
A tranche (from French, a “slice” or “portion”) refers to a financial product that can be split into distinct pieces that can be offered to buyers or lenders, each with their own risk-reward profile.
Credit vaults can be created with up to three tranches, meaning they can also support two-tranche or single tranche deals.
How do interest & repayments flow to lenders?
Let's take a vault with 3 tranches: A/B/C, with A being most senior.
In this example, Tranche A has a fixed interest rate of 6%, Tranche B has a fixed interest rate of 10%, and Tranche C receives any excess funds in the vault after Tranches A and B have been paid amounts owed. Tranche A has $6mm in principal, subordinated by Tranche B ($2.5mm principal), and Tranche C ($1.5mm principal).
Over the life of the vault, each tranche linearly accrues interest owed based off its coupon rate. For instance, after 30 days tranche A with 6% interest rate is owed $6.03mm =$6mm*[1+(6%*(30/365))] and after 365 days it is owed $6.36mm =$6mm*(1+6%).
When funds are repaid to the vault, they are distributed by a waterfall where the most senior tranche's amount owed must be repaid before the subordinated tranche can withdraw. The following illustration shows how such a vault would handle various scenarios:
What is the capital formation period?
During the capital formation period, lenders can commit funds to one or more tranches of the vault, with assurance that the vault smart contract will return funds if certain requirements are not satisfied. If requirements are not satisfied by the end of the period, then capital is returned to lenders with no additional fees.
In this way, lenders can stipulate that deals must reach a specific minimum size and/or with specific ratios in order to go live.
For example, a credit vault may launch with a capital formation period of 30 days, with requirements that the total deal size is at least $5mm with at least 30% of funds in the junior tranche. If the vault does not meet this criteria at day 30, the vault will return funds to lenders and move to 'Closed' status.
How are lender restrictions / permissions managed?
Portfolio managers ("PMs") can define lenders access rules / restrictions for each individual tranche. Like other pools on TrueFi, PMs can set their own policies for permissioned or permissionless pools.
For example, a PM could make the equity tranche open to only one specific wallet address, while enabling all ID verified addresses to participate in the junior and senior tranches.
Lender restrictions (as well as redemption policies, fee structures, and more) can be configured to a PM's spec by using Controllers, customizable logic that helps TrueFi vaults meet the varied needs of financial users.
What are the fees on Credit Vaults?
Vaults pay a protocol fee to the TrueFi DAO treasury. Fees accrue are quoted on a per annum basis, accrue block-by-block, and are paid upon each smart contract interaction (lend/withdraw/disburse loan/repay loan).
The example below illustrates how the protocol fee works:
Protocol Fee example
Take an example vault Verum Fund, which holds 1,000,000 USDC worth of loans and assume protocol fee = 50 bps per annum (0.50%).
Assuming the value of Verum Fund grows linearly from 1,000,000 USDC to 1,100,000 USDC over the course of 30 days (avg. value of 1,050,000 USDC), the vault would pay a protocol fee of 431.51 USDC for this time period:
Protocol fee = 1,050,000 USDC * 0.50% * (30/365) = 431.51 USDC
Additionally, PMs can set an optional Portfolio Fee. Portfolio Fees are paid to the PM, and can be configured such that they are accrued linearly over time, or paid as a flat fee at time of deposit and/or withdrawal.
For up-to-date fee rates on each vault, please see vault pages at https://app.truefi.io/.
Are Credit Vaults audited?
Yes, see here: https://github.com/TrueFi-Protocol/contracts-carbon/tree/main/audits
Can I demo Credit Vaults?
Yes, see Credit Vault tutorial.
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