AMA Highlights – TrustToken

By Daniel Dal Bello, Director.

December 12, 2020 – 10 min read.

On Thursday 10 December, we welcomed Rafael Cosman from TrustToken into the Hillrise Capital Telegram chat for an AMA. Rafael is a cofounder and the current CEO.

You may have heard of TrueUSD, a stablecoin with independently attested and live updated ‘Proof of Reserves’ published on-chain, but that’s not all. TrustToken are working to revolutionize the DeFi industry with their major currency stablecoins through to completely “uncollateralized” lending.

In this post, we have compiled key questions and answers from the event.

Daniel Dal Bello
Welcome Rafael, thanks for joining us today. Looking forward to getting into some of the details behind TrustToken as a whole and some of your DeFi componentry. We really enjoyed exploring the truefi app this week.

We’d love to start with your background and how you came to be leading TrustToken.

Ray Reijnders
Hi Rafael, excited to have you here! It’s always great to see a CEO who is so involved in his own project, I really like your down to earth approach, the video explainers made by you – and of course that you got us to actually try and fully understand your platform and products!

Rafael Cosman
Thanks for having me! I studied CS at Stanford and encountered cryptocurrency and blockchain there. Afterwards I worked for a while at Google doing AI research, then I left to start this company. I knew for a while that I wanted to start a startup, it always seemed like one of the highest impact things to do.

Daniel Dal Bello
What got you onto the path of stablecoins? Curious!

Rafael Cosman
Well to be honest when we started this company it was an estate planning company. We made software to help people create their wills and trusts. Then about a year in, when we were just getting our first users and first revenue, we decided to make a hard pivot.

We saw what was happening in cryptocurrency and thought there must be some big opportunities here. Already at that time we had a unique team given that we had both attorneys and tech people like me on a small startup team. Most startups are purely tech. At the time (2017) there was only Tether, and it was a pretty glaring hole – that nobody had made a trustworthy alternative.

So we moved on it! The rest is history.

But at this point we’re actually shifting our focus away from stablecoins, it will still be a part of what we do, but we’ve launched a DeFi product and associated token and that’s really where we see our future.

Daniel Dal Bello
Let’s talk about the TrustToken ecosystem. You have 2 products at this point in time: TrueFi – uncollateralized lending, and TrueFx an on and off-ramp for crypto-markets. Can you talk us through the product suite?

We’ve also noticed stablecoin baskets being mentioned as a part of TrueFx. Are there any additional ways of utilizing your stablecoins in the works?

Rafael Cosman
Yes, so let me start with TrueFi & TRU. TrueFi is a DeFi protocol for uncollateralized lending. Why we decided to build it is similar to TUSD actually. It looked like a glaring hole. There are multiple protocols focusing on over-collateralized lending, Compound, AAVE, and Maker are the big ones. Each of those three has over $1 billion in assets locked – huge!

But not a single major protocol has focused on uncollateralized [lending]. We think the market is as big or bigger. AAVE has started to make some moves in this direction but it’s still not their core focus, it’s the core focus of TrueFi and so I think we’ve got a good shot at winning it. It’s that simple. All the rest are details and execution.

One good place we may be able to get to in a year or two: $1 billion in outstanding loans at 13% APY = $130mm/year in interest. 10% of interest can be used to buy-and-burn TRU which = $13mm/year TRU burned. Very rough economics of what our lending and token economics could look like.

“Not a single major protocol has focused on uncollateralized. It’s the core focus of TrueFi and so I think we’ve got a good shot at winning it. It’s that simple.”

The token is important for having decentralized governance and bootstrapping liquidity in the protocol.

Ray Reijnders
TrustToken has committed to reinvesting or burning any TRU that is generated by the companies’ own funds. I’ve read that you have already burned some TRU through this. Do you have any projections on the amount of tokens that will likely be burned by this in the coming months?

Also very curious to understand more about the ‘reinvesting’ mentioned here, would that be in pools, or the actual company?

Rafael Cosman
Of course that would be in the incentive distribution and not in the company. We’ve committed for the first 6 months that any TRU our company farms will either be burned or go back to the protocol’s incentive distribution – we’re not going to keep a cent of it. Here’s why uncollateralized lending is interesting. Right now our lending pool is returning 11.5% APY [13.6% as of December 12th 2020].

This is unboosted – as in without any TRU rewards. With TRU rewards it’s even more interesting at 50.55% APY currently [53.25% as of December 12th 2020].

But it’s important to note that even “un-boosted”, this is one of the highest stable yields in DeFi. Compare that to what you might earn on Compound right now. Of all of their assets, the very highest APY is 3.1%. So, our boosted APY is beating theirs by a factor of 3.7x right now.

And that’s just their highest APY asset, not their average. Now that’s not because Compound isn’t a strong DeFi platform, in fact they are one of the very best. But that’s the nature of “uncollateralized” lending vs “overcollateralized” lending.

Daniel Dal Bello
Can you give an explanation on how this [uncollateralized lending] works and how the risk balances? Most at the surface would assume this is very high risk lending, so what are the details?

Rafael Cosman
Alameda Research, Invictus Capital, and soon many other borrowers will be taking out loans at very favorable APYs. Currently averaging around 11.5%. Nobody is willing to pay that much if they have to put up a ton of collateral. Not having collateral means that these loans may be more risky, and so that’s why TRU tokens holders have to be careful who they let onto the platform and what credit limits they approve for each borrower.

See forum.truefi.io for more info on this.

So overall, putting stablecoins in TrueFi may be riskier than putting money in Compound or AAVE. But the rewards are of course much higher as well. So overall, I think a mix of both types of lending will prevail in DeFi and many investors may want to diversify some assets in lower risk / lower reward, and some in higher risk / higher reward.

But I think you can see why we think uncollateralized lending is going to be at least as big as the $3 billion plus overcollateralized lending market already in DeFi, and we’re basically the only major platform live today so I think we’ve got a good shot at it.

Ray Reijnders
We’re very curious about your thoughts on gamification in decentralized finance. I’m really liking the prediction market aspect attached to the platform!

Rafael Cosman
Good question, so the way the platform works today is that TRU holders can approve borrowers and approve their loans. Nobody gets a loan on the platform without approval from TRU holders.

TRU holders are incentivized in multiple ways to think carefully (and even conservatively).

(a) if there is a major default on the platform their TRU is likely to be worth less, and
(b) if you approve someone’s loan, you actually have to stake your TRU on that loan, and if the loan is not repaid some of your TRU is slashed.

If the loan is repaid you actually get a bonus. The details of this are in the technical spec.

But if folks want to try it themselves here’s what you do. To participate as a lender in the TrueFi lending pool, you go here and click “Lend”. You put TUSD into the pool and then that TUSD is lent out by the pool at ~11.5% APY. To participate as a TRU holder in governance and staking, you need to have some TRU. Right now there is significant liquidity for TRU on Uniswap, may be other places as well in the future.

Then you go to the staking page and can review requests from borrowers. Then we also have some farms. I see farming as growth marketing but also as a way to distribute TRU more widely. All kinds of participants end up holding TRU and governing the protocol. Right now the APYs on these farms are pretty sweet.

Daniel Dal Bello
As of now you only support the borrowing of $1,000,000 to $10,000,000 by well known and trusted companies such as Invictus and Alameda as we mentioned. Are there any long term plans to enter different markets, including personal loans, SME loans or even something like mortgages on tokenized real estate in the future?

Also, what are your thoughts on the future of voting on larger loans and adjusting the 1:1 vote process for approval?

Rafael Cosman
At some point, yes – but it’s ultimately up to TRU holders! The parameters of the pool such as who the approved borrowers are, loan size, APY limits, term limits etc. are all up to TRU holders.

Right now we are taking votes for these things here – but we will soon be moving to a snapshot system for voting. We will be getting much more decentralized over the coming months and TRU holders may also at some point decide to create additional pools.

TrueFi can support pools that focus on different classes of loan, for example, there could be a pool that focuses on personal loans or SMEs and another one focused on institutional borrowers. But at the moment, I believe the TRU community is focusing on growing the one pool we have and increasing the number of high quality borrowers.

We’re thinking of adjusting the voting process at some point in maybe Q1 of next year. I think we will be moving to a more sophisticated lending model where rather than approving individual loans, TRU holders will be approving borrowers and setting their credit limits and risk factors, and then updating those over time as new data comes in – but not approving individual loans, because it’ll get unmanageable with too many loans. I think we may move to a model that’s more like a line of credit.

Let’s say Alameda is approved for a credit limit of $10 million. They can pull on that at any time and pay it back any time and the interest rate will flex up and down depending on overall usage of the system. But we wanted to launch with this simple model of fixed term, fixed interest rate loans because it was simple and easy to reason around. We don’t think it’s the ultimate model, just a secure and solid starting place.

Ray Reijnders
It was specifically mentioned that you are aiming to decentralize the borrowing process as much as possible. As of now, your community can already decide if a borrower has sufficient reputation for a loan etc.

Are you considering allowing your community to also help guide the development of the platform through the use of a DAO connected to your governance token, for example, product expansions?

Rafael Cosman
Yes, that’s the plan!

Votes right now happen pretty casually on the forum, we’re moving to snapshot soon, and sometime in 2021 will likely be moving to actual on-chain, completely binding votes. We are aiming for this to be 100% decentralized in the sense that a bus could hit me and my entire team and the platform would continue just fine.

Of course we will still be careful when we cross the street, but you get what I mean.

Daniel Dal Bello
As you work with Ethereum, to what extent do you see a large number of layer-1 solutions and scalable layer-2s entering the market impacting DeFi?

This as slow transaction speeds and expensive gas fees tend to bog down Ethereum from time to time, raising the barrier to entry for smaller investors on platforms like yours. To build on this question, is interoperability something that you are considering for the future, and if so to what extent?

Rafael Cosman
Yes it’s definitely a problem. The fees make it difficult for smaller investors to do anything profitably. Because the fees you pay getting your money in and out can really add up!

Fortunately it’s not just our platform, it’s something Compound, AAVE, Maker, Curve etc. all struggle with as well. Interoperability is something we’ve considered and we’ve actually already taken the first step which is issuing TUSD on other blockchains. TrueFi is a bit more complex but could be launched on other blockchains as well.

I think Serum for example is a very exciting project. It’s built on Solana and I could see us launching TrueFi there at some point once we’re more established on Ethereum, but of course having decentralized governance of a cross-blockchain project is not easy, [there are] many technical challenges we’d need to figure out. But if ETH is not able to improve its gas situation then us and may other DeFi projects may need to start moving in this direction.

The text in this summary has been adapted to correct grammatical errors and for presentation purposes. We thank our guest Rafael Cosman for joining us for this AMA. For more information on TrustToken, visit https://www.trusttoken.com.