How loan tokens work
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Loan tokens are non-tradable ERC-20 tokens which represent the lender’s proportional representation in a loan that is issued from the Lending Pool.
Each loan issued from the Lending Pool will create a unique loan token used to track the present value of each loan. Loan tokens form an important building block of TrueFi, as they can operate independently from the TrueFi lending pools. Tokenized loans open up opportunities for calculating and tracking the value to the individual loans within the Lending Pool. TrueFi does not allow for the transfer of Loan tokens and will not create a secondary market for loan tokens. It is important to note that all Loan tokens are unique and can be tracked on the page of the TrueFi website.
Creating a Loan token requires a borrower’s wallet address, principal amount, term, and interest rate or APR associated with a loan. When a loan is , loan tokens are minted by funding the loan token contract with the principal amount. The minted loan tokens represent a share in the total amount payable at the end of the term which is the sum of principal and interest.
Loan tokens are minted at a discounted rate, meaning that loan tokens paid back in full will converge to a price of 1.000:
# of loan tokens minted = principal + interest owed at loan maturity
Once a loan is funded, the borrower can call a function which allows them to borrow the funds from the smart contract. At the end of the term, once the borrower pays back the loan, loan token holders can exchange their loan tokens for an equivalent number of stablecoins.
Example:
When a loan with principal = 1,000,000 USDC, term = 30 days, APR = 12% is approved, 1,009,863.013 ( = 1,000,000 + 1,000,000 x 12% x 30/365) loan tokens are minted.
At maturity, if the borrower repays the entire loan amount along with interest, the lending pool can exchange 1 loan token for 1 USDC.
The theoretical present value of a loan token is calculated by assuming the loan is repaid in full by the end of the loan term.
The following formulas walk through how lending pools value loan tokens (where loan token `0xabc` represents a single loan, and `t` represents time since loan origination):
Value of all 0xabc loan tokens minted = principal + (t / term ) x interest
Value of a single 0xabc loan token = (Value of all 0xabc loan tokens) / (supply of 0xabc loan tokens)
Value of a single 0xabc loan token = (principal + (t / term ) x interest)/(principal + interest)
Example:
When a loan with principal = 1,000,000 USDC, term = 30 days, APR = 12% is approved, 1,009,863.013 ( = 1,000,000 + 1,000,000 x 12% x 30/365) loan tokens are minted.
The value of a single loan token at n days (where n is less than or equal to 30) is 1,009,863.013 USDC (=1,000,000 + (n/30) x 9,863.013)).