Lines of Credit
Automated lending pools governed by supply/demand curve
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
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.
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.
Yes, each line of credit has a specified maturity date (
endDate). All debt and interest is due by this maturity date. Once maturity has passed, borrowers cannot draw additional capital and lenders cannot lend additional funds to this line of credit.
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 (lines of credit can be permissionless, or permissioned pools).
Lenders can withdraw from the portfolio’s idle funds at any time funds are available. 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.
Once a line of credit has been created, borrowers can withdraw idle funds at any time before the pool's maturity (
endDate). After maturity, deposit and borrow actions within the line of credit are disabled, and borrower must repay all principal and 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”).
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.
- 2.If vote passes, then the address requesting creation is allowlisted for line of credit creation. Borrower deploys Line of Credit with approved parameters.
- 1.Borrowers define base parameters:
- Underlying token: can denominate pool in any ERC20 (including but not limited to USDC, USDT, WETH, etc)
- protocolFee (const) = 50 bps paid by lender at withdrawal
- premiumFee [optional]: = set to 0 by default; can be configured by borrower
- endDate: all loans must be repaid by end date
- maxSize: principal in portfolio cannot exceed this amount
- “Lender restrictions” (aka deposit strategy): portfolio can be permissioned, can use whitelist or signature to determine who can lend
- 2.Configure Interest rate curve (similar to Aave/Compound/other protocols, borrowing rates are defined by a rate curve). For a worksheet example, see this spreadsheet.
- Set Interest rate min/optimum/max
- Set interest rate curve “kinks”
- Note: TrueFi core team are happy to consult with borrowers to help set these curves For brief demo of configuration, please see this for video of ALOC interest rate curve configuration: https://twitter.com/TrueFiDAO/status/1511034505028583426
Portfolios pay a standard protocol fee of 50 bps (0.50%) per annum to the TrueFi DAO treasury. Fees 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:
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.