Typically, in the world of cryptocurrency, borrowers are forced to overcollaterise in order to take out a loan. Given the volatility of crypto, this is intuitive – overcollaterisation helps reduce the chance of the collateral being worth less than the loan in the event of a market drop. For example, if I want to take out a loan of $10,000 USDT, I would normally be forced to collaterise with $15,000 of crypto – a collaterisation ratio of 150%.
While this security buffer makes sense from a lender’s point of view, for the borrower it reduces the efficiency of capital, given the collateral – $15,000 in the above example – is sacrificed; I cannot earn yield or use that capital elsewhere.
So, is uncollaterised lending possible in crypto? We do see the practice in the trad-fi space, but so far, crypto has yet to crack it. This is where TrueFi come in, a protocol created by TrustToken for uncollaterised lending, powered by what they say is the first ever on-chain credit scores. Governance is done via holders of the TRU token, who also decide whether borrowers are credible. With a permissionless system of credit, the hope is that the loan process can be streamlined and operated purely through incentives.
Last month, TrustToken unveiled its first single borrower portfolio on the TrueFi platform. Designed specifically for Alameda Research, the digital asset trading firm, it is slated to grant up to $750 million in working capital in its first year. We caught up with Michael Gasiorek, the Head of Marketing at TrustToken, to dig deeper in to the DeFi protocol and the single borrower portfolio. We also spoke to Co-CEO of Alameda Research, Sam Trabucco.
TrueFi – Michael Gasiorek, Head of Marketing
Invezz: Do you think the overcollateralised loan market in crypto will lose market share to the uncollateralised sector, and/or do you foresee a split in demographics between the two (i.e. retail/individuals using overcollateralised loans and institutions using uncollateralised loans)? Do you think the uncollateralised loan market will ever overtake the overcollateralised?
Michael Gasiorek: We do think uncollateralised lending will eat up overcollateralised lending, absolutely. We’re building our business around this bet for two reasons: firstly, because uncollateralised loans are simply a better, more capital-effective way of utilizing one’s capital – and that’s true for institutions just as much as the retail sector. Secondly, because this same phenomenon has long played out in the traditional finance sector across a whole range of debt instruments, from personal credit to student loans and beyond. The primary reason unsecured lending isn’t already more popular in crypto is because the sophistication of credit scoring and collections has not yet caught up to the sophistication of blockchain lending overall. We expect that to change rapidly, and we expect to be among the key companies to contribute to the solution.
IZ: How decentralised do you foresee TrueFi becoming, or will there always be an element of centralisation? More specifically, will it ever be possible to complete processes such as KYC and borrower vetting automatically on chain? If so, do you have a timeframe in mind?
MG: We believe TrueFi will become fully decentralised over time. We are working with a number of projects to decentralise features like KYC and borrower vetting, and are deep into our own operational and legal process for protocol decentralization. As with all new development and regulatory compliance, timeframes are difficult to predict.
IZ: Would you consider working together with other protocols to help build more accurate credit scores (or do you think it will not be possible anytime soon to interact with other blockchains)? What about other Ethereum platforms such as AAVE?
MG:We’re doing more than thinking about it: We’re well into conversations with a select few protocols that are focused on building these scores, and with a few projects on making them more widely available across DeFi. While it may be early to realize credit scoring across multiple chains, we expect to have both more robust credit scoring partnerships and a more widely available means of sharing these scores with other protocols soon. We hope to have these scores ultimately directly affect the rates and collateralisation ratios of top borrowers across not just well-known protocols like AAVE, but also the many DeFi protocols still being built, as the industry-wide move to uncollateralised or undercollateralised lending gains momentum. We credit this progress not just to our team, but much on the value of great partnerships. It’s too early to name names, but you’ll be able to make some educated guesses of our collaborators over the next quarter or two. In the meantime, if you’re a builder, you’ll also see us creating developer bounties at various hackathons and conferences to get our credit scores into deeper circulation – more on that soon, too!
IZ: I note there has been a plan to move away from the loan approval via voting system, to an automatic on-chain model. This is extremely intriguing – do you believe this is still quite far off in the future (for reasons such as the likely time period involved in developing smart contracts and the complexity of the loan market)?
MG: Voting on loans was a good way to bootstrap a credit model, with the wisdom of the crowd. However, it was never the plan to rely on public engagement to vet multi-million dollar loans – especially as these decisions often had to be made with informational asymmetry, based on NDAs signed with the borrowers in question. In brief, public voting needed to be replaced: The gas cost of voting, the information gap present in these votes, and the turnaround time to vet a new loan were suboptimal for lenders, borrowers, and the protocol alike. That said, without this system, TrueFi would never have built the lending book nor repayment history that allowed our modern credit model to exist.
As far as adopting the credit model into daily lending, I believe we’re nearly ready to make the official switch to model-based lending outright, pending a few more frontend and backend tweaks – all largely made in the open, with DAO approval. We expect rolling out lending based on the credit model will allow us to eliminate the gas cost of loan approval, cut down the time to getting cash in a borrower’s hands to minutes versus days, lighten the load on our TRU holders, and overall, grow our lending book dramatically. Naturally, we’re working hard to get the model in circulation ASAP.
IZ: Another prime source of centralisation is that the legal agreements for the loans are centralised and off chain – is this possible to move (I note the DAO plans – is this still being worked on)?
MG: Without overstepping the plans of our legal department, I can comment that we’re investigating how to move contracts with our asset managers and borrowers on-chain, inspired by the incredible work of certain legally-robust DAOs we’ve long been watching. We expect that it’s possible, yes, to move much of the documentation on-chain, and to also make it more – if not totally – transparent.
IZ: TVL on the platform is currently $416mill – where do you see yourselves going ? Additionally, there has been a 21% decline in TVL over the last month, which is the second largest drop in the Ethereum top 50 (according to Defi Llama). What do you think is the reason for this and does volatility such as this concern you going forward?
MG: We’ve said it before: We expect TrueFi, in due time, to become a trillion-dollar protocol. Bold, but not unrealistic: With the cost savings, speed, and global access provided by blockchain technology, we genuinely believe TrueFi stands to capture at least a few percent of the global ~$8 trillion lending market. After all, we hit our first billion in lending, with no defaults, within our first year, just lending to crypto funds – proportionally, a tiny fraction of the global lending demand.
That said, let’s look at our past and present TVL. First, with the markets in disarray, demand for capital has sunk to recent lows, both in size and in rates. Lower demand for capital means lower capital supply from lenders, who are, quite reasonably, off chasing yield elsewhere. Second, TrueFi is going through a transformative change to its design in terms of the customers it serves – now, asset managers building bespoke portfolios, not just crypto borrowers looking for cash – comparable in scope to the iPhone before and after the app store. So, too, is TrueFi changing in nature of its component parts: the business units necessary to stand up new funds, the KYC requirements that now come with certain financial opportunities, the implementation of a credit model that entirely changes the relationship of TRU holders with the platform – to name just a few key changes. That, naturally, means growing pains as this new business is stood up.
All that said, we see the new model working: Since launching the TrueFi lending marketplace, TrueFi is now home to 7 total financial opportunities – with at least 3-5 more planned for launch before the quarter is up. These portfolios are serving a diversity of opportunities, from protocol-to-protocol lending with Perpetual Protocol to B2B lending in LatAm with delt.ai and single borrower pools lending to the world’s most desirable borrowers in crypto.
We expect these portfolios to offer two benefits no other unsecured lending protocol can match. For lenders, they mean a diversity of financial opportunities that go far beyond what’s usually available in DeFi. For the protocol at large, they grant a diversification of market sectors that makes both our TVL and our Total Value Outstanding (that is, “cash at work”) more robustly distributed across sectors insulated from crypto’s boom and bust cycles.
As the market levels out, as TrueFi continues to diversify its serviced financial opportunities, and as demand for capital once more boosts rates, we expect TrueFi to be in the best possible position to hit that eventual trillion-dollar goal. Until then, we’re heads down, building.
Alameda Research – Sam Trabucco, Co-CEO
Alameda Research are a multi-strategy cryptocurrency trading firm, who are expected to draw up to $750 million of working capital from the first single borrower portfolio on the TrueFi platform. In addition to our interview with TrueFi, we caught up with Alameda Co-CEO Sam Trabucco to ask him a couple of questions on TrueFi and uncollaterised crypto lending.
Invezz: How does the interest rate for the SBP (as well as other transactions you have completed with TrueFi) compare to what you would be able to get elsewhere on the market?
Sam Trabucco: The interest rate is competitive with what we can get elsewhere.
IZ: How much of an advantage is it to receive an uncollaterised loan, compared to the more traditional overcollaterised crypto loans?
ST: Uncollateralised loans are much more capital-efficient, so it is definitely preferred.
IZ: Do you have an opinion on the future of the TrueFi protocol, as well as uncollaterised lending at large?
ST: We believe on-chain uncollateralised lending will continue to grow and see TrueFi as one of the beneficiaries through that growth.
IZ: Will the investment thesis for the SBP differ from the rest of the firm’s activities, or will it be largely to power the same trading and arbitrage strategies (and would you be able to give more of a picture on specifics)?
ST: The funds from the SBP will support the company’s trading, market making, and investing activities.
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