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TrueFi Borrowing Pool AMA Summary

TrueFi AMA

Following TrueFi's post on the dYdX forums proposing to move the dYdX borrowing pool to TrueFi, the dYdX Foundation hosted an AMA session with the TrueFi team on August 17. Unfortunately, there was an issue with recording the session, so we have summarized the key questions covered and takeaways in this blog post.

This session was hosted by Joshua and Cliffton from the dYdX Foundation.

TrueFi team:

Summary of questions asked & key takeaways

1. How would this implementation work? What are the benefits of TrueFi administering the borrowing pool for dYdX, and how it would be different from the current borrowing pool that dYdX has?

  • The original dYdX borrowing pool was successful in raising capital, but not as strong in onboarding borrowers and deploying that capital across multiple borrowers.

  • In Sixtant’s post proposal to wind down the borrowing pool, they pointed out that roughly 70% of the pool was not borrowed and sitting idle. This has resulted in the community over-paying DYDX rewards to liquidity module stakers.

  • New borrowers generally failed to provide adequate disclosure and the dYdX community did not mobilize to onboard more borrowers.

  • TrueFi’s has an efficient onboarding process and relationships with many major liquidity providers.

  • 2 key benefits behind TrueFi (and a portfolio manager) administering the borrowing pool include:

    • Higher utilization of funds and improved liquidity for lenders, and

    • Due diligence performed by a third party.

2. What are ALOCs (Automated Lines of Credit)?

  • ALOCs, otherwise known as automated lines of credit are lending pools for a single borrower, where the interest rate paid by borrowers is determined by a configurable interest rate curve.

  • For lenders, ALOCs deliver higher utilization and improved liquidity. Lenders can withdraw idle funds at any time and re-allocate them to the best-performing market makers. 

  • For borrowers, each market maker has access to borrow USDC at a predefined interest rate curve. As an initial proposal, all borrowers might have a fixed interest rate of e.g., 4% on loans while pool utilization is below 90%, where rates can spike up to 6% if utilizations go above 90%. 

  • Read more about ALOCs on TrueFi's docs.

3. How would rewards work? Would lenders be getting both TRU and DYDX rewards every epoch as compared to just DYDX rewards?

  • As it stands today, there are no proposals to put TRU incentives on DYDX incentivized ALOCs and they are actually not needed. The estimate here is that TrueFi will already be cutting the total amount of DYDX rewards by half. 

  • Today, lenders to the dYdX pool receive USDC and DYDX incentives. In the new proposed model, borrowers would pay a nominal rate of ~4%, and lenders generate returns from this interest paid by market makers in USDC, along with DYDX token emissions. 

  • TrueFi’s value here is being a reliable piece of lending infrastructure that to date has originated $1.7 billion+ of loans and has been able to successfully onboard dozens of market makers and liquidity providers.

4. How can we ensure that the borrowed capital is actively being used on dYdX?

  • TrueFi has both a short-term trial and a long-term proposal here. 

    • The short-term trial proposal involves TrueFi working with existing borrowers like Wintermute, Sixtant and Folkvang. These market makers will withdraw the USDC they would like to borrow into their own custodial wallets, and then deposit the borrowed funds to dYdX. TrueFi will run manual checks to ensure that the amount borrowed tallies with the capital deployed onto dYdX.

    • For the long-term proposal, TrueFi would be very happy to build out a smart contract solution (really just an adapter sitting between TrueFi and dYdX) to offer more certainty that the funds can only be used on dYdX. This removes the manual tallying and works autonomously.

5. Since this involves non-collateralized loans to borrowers, who bears the risk of default? What are some measures taken to minimize the risk of borrowers defaulting?

  • In this case, the lenders would bear the risk of a default of these funds. TrueFi will work with the dYdX community to set up a Portfolio Manager ("PM"), who will be responsible for approving and onboarding borrowers for these ALOCs. The PM would be responsible for pursuing the borrower in an event of default. 

6. Have these smart contracts been audited?

  • The smart contracts have been audited by ABDK, Solidified, and Adam, a freelancer who works for Gnosis. 

  • They have also been formally verified by our internal security team using Certora.

7. What elements of the process are governable by DYDX holders?

  • Electing a PM.

  • Criteria to approve and onboard borrowers.

  • Delegating the responsibility of approving borrowers to the PM.

  • Token incentive rates for borrowers per Epoch.

  • Determining metrics for borrower accountability.

  • Whether a borrower's DYDX incentives should be turned on/off.

    • Once a borrower hits the dYdX defined trading metrics (assuming the dYdX community would still like to use these metrics), they will be eligible to have DYDX incentives applied to their pool.

    • If a borrower does not achieve the requirements, they can have DYDX incentives for their ALOC turned off.

  • Borrowing cap for all borrowers.