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TrueFi in the credit industry: Risks and opportunities in credit lending business.

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Possible explosive growth for the credit lending industry with the improvement of infrastructure in the future.

Original Title: "TrueFi in the CeFi Landmine Storm: Risks and Opportunities of Institutional Credit Lending Business"

Original Author: Colin Li, Mint Ventures

Section 1 Research Report Highlights

1. Core Investment Logic

Crypto credit is still in its early stages. Credit lending is a large-scale industry in traditional finance, but in the crypto industry, it is still just a small niche in the lending sector. With the improvement of infrastructure in the future, the credit lending sector has the potential for explosive growth.

The risk control ability is excellent, and there have been no bad debts. TrueFi is the leading project in the credit track now. It has not encountered any problems so far since the DeFi and CeFi crash in 2022, maintaining a 0% bad debt rate.

The governance model and business model incentivize TRU holders to actively participate in governance. Unlike lending models like Aave, which can monitor the liquidation line in real time after lending, current credit lending is a risk-preceding and profit-following business model, which requires more attention to risk management before lending. By rewarding TRU stakers with interest income and other incentives, the risks and returns of TRU stakers are unified, making them more willing to actively participate in the project governance process.

2. Valuation

Due to the downstream demand of credit lending being linked to strong cyclical financial activities such as arbitrage, TrueFi's investment strategy may resemble that of traditional cyclical stocks, and as the business scales, it may gradually shrink in bear markets, causing indicators such as PS and PE to soar.

3. Main Risks

Overall, TrueFi faces five risks:

(1) Competition from other projects in the credit loan track. (2) Credit DID is gradually maturing and breaking the monopoly of the current TrueFi risk model. (3) Regulatory measures are tightening in the crypto field, leading to a shrinking demand for credit from downstream institutions. (4) Can the 0% bad debt rate be sustained, especially during the repayment peak in August this year? (5) The risk control handling mechanism after bad debts have not yet been tested.

Section 2 Project Overview

1. Project Business Scope

TrueFi is a credit lending protocol that currently focuses on providing unsecured lending services for stablecoins to crypto-native trading investment institutions, and will gradually explore unsecured loans to companies and individuals in the future. Recently, TrueFi has partnered with Woo Network to expand its non-stablecoin credit lending business.

2. Development history and roadmap

In February 2018, TRU conducted a Pre-Sale on CoinList, raising approximately $28 million in funding.

First stage:

2020.11, V1 version was released, and TRU token was issued at the same time. However, V1 version only issued credit loans based on TUSD.

Phase Two:

From November 2020 to February 2021, the V2 version was deployed and added:

(1) "Liquid exit", convenient for deposit users to withdraw.

(2) Improve the staking model, changing from staking for individual loans to staking for all loans, and staking can also earn TRU and interest income.

(3) All governance is recorded on the blockchain.

Phase Three:

From March 2021 to May 2021, the V3 version was deployed and added:

（1）USDC pool

(2) Improved credit model.

(3) Allow trading of loan tokens (deposit certificates obtained by depositors after depositing stablecoins, similar to Aave's aToken).

Phase Four:

From June 2021 to August 2021, the V4 version was deployed, which added: (1) support for any ERC-20 token; (2) allowing other lending protocols to provide liquidity for TrueFi loans; (3) allowing other protocols to become channel providers for credit loans; (4) launching the USDT pool; (5) establishing the SAFU (secure asset fund for users) to prioritize investor repayment in the event of loan defaults, and injecting 5 million TRU tokens.

Fifth Stage:

2021.09 to present: Deployed V5 version, planning to add:

(1) Deployed on Layer2, now deployed on optimism.

(2) Supports "protocol-to-protocol" lending and has provided credit services to Perpetual Protocol.

(3) Non-stablecoin lending products have now partnered with Woo Network.

(4) Improvement of credit model

(5) Improve stablecoin lending pool, BUSD pool has been added.

3. Business Situation

3.1 Service Objectives

TrueFi's customers are divided into two ends: deposit and borrowing.

On the deposit side, anyone holding USDC/USDT/TUSD/BUSD can deposit stablecoins and choose the corresponding lending pool to add liquidity, thereby earning interest on their loans.

On the borrowing side, there are two types of businesses:

The first type of business is credit lending business regulated by TrueFi DAO - TrueFi DAO Pools. TrueFi's early positioning for this business was to serve crypto-native trading investment institutions, and gradually expanded to other protocols. In the future, it plans to further expand to companies and individuals. The main borrowers in the loans already issued include: trading investment institutions, trading platforms, market makers, DeFi, high net worth individual investors, asset management companies, etc. From the number of loans, crypto-native trading investment institutions and market makers are the main borrowers.

The second type is the lending project managed by third-party independent organizations - TrueFi Capital Markets, with borrowers including TrueTrading, Cauris Finance and other institutions.

Recently, TrueFi has partnered with Woo Network, with the depositors being a specific WOO DAO and the borrowers being certain trading clients within Woo Network. In the future, this type of credit service targeting specific clients will also become one of TrueFi's important business lines.

3.2 Business Classification

Now TrueFi has two business lines: TrueFi DAO Pools and TrueFi Capital Markets.

TrueFi DAO Pools are all stablecoin credit loans, with risk management responsibility held by TrueFi stakers and the TrueFi rating committee. They support TUSD, USDC, USDT, and BUSD. TrueFi Capital Markets includes both stablecoin credit loans and non-stablecoin credit loans, with business-specific risk management handled by external managers. Stablecoin credit loans support TUSD, USDC, USDT, and BUSD, while non-stablecoin credit loans are currently in partnership with Woo Network and have specific customer targeting.

Source: https://app.truefi.io/home

3.3 Business Description

3.3.1 TrueFi DAO Pools

TrueFi DAO Pools is a credit loan business directly managed by TrueFi. The entire business process is as follows:

Source: https://truefi.io/

On the deposit side, users can choose from four stablecoin pools: BUSD, USDC, USDT, and TUSD4.

After depositing the corresponding stablecoin, users can receive tfToken to represent their principal and interest. At any point in time, tfToken has a price, but this is based on an estimated value assuming all loans in the pool are fully repaid in the future. If the underlying assets default at maturity, investors holding tfToken may suffer losses.

Source: https://app.truefi.io/home

Each stablecoin pool consists of two parts: loans and unused funds. Taking BUSD Pool as an example, as of August 4th, there are a total of three underlying loans: two loans that will expire within 30 days, one loan that will expire in 1-2 months, and two loans that will expire in 2-3 months; 5.16% of the funds in the entire pool are unused.

Source: https://app.truefi.io/pools/0x1Ed460D149D48FA7d91703bf4890F97220C09437

(Note: The content is already in English, so no translation is needed.)

However, users can also choose not to directly deposit stablecoins. When selecting "lend", they can directly purchase the corresponding tfToken, which means buying the corresponding tfToken in the Uniswap pool. However, due to the very low liquidity, the price will be higher than the fair price when purchasing.

Source: https://app.truefi.io/lend

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Users do not need to wait for the underlying loan to mature and can redeem assets at any time, as long as there is sufficient liquidity in the stablecoin pool.

On the lending side, the business originates from the borrower initiating a loan application.

To become a qualified borrower, you need to fill in relevant company basic information and loan basic information.

First, submit an application, including information about the applicant and the applying company, complete KYC and pass the review to become a qualified borrower. However, there is a prerequisite here, that is, the applicant has at least 10 million US dollars in net assets without debt burden. After filling out and passing the review to become a whitelist borrower, you can initiate a loan application, which requires submitting information such as credit limit, purpose, and term, which is no different from traditional bank lending. After all the above steps are completed, the borrower obtains financing, and their credit loan will be deposited into the corresponding stablecoin pool.

Source: https://truefi.io/institutions

Source: https://app.trusttoken.com/choose-account-type

In order to evaluate the creditworthiness of borrowers, TruFi has launched the "TrueFi creditworthiness score" in the third phase, with a score ranging from 0 to 255. The assessment of the "TrueFi creditworthiness score" will affect the borrower's credit limit and interest rate level. This evaluation system will assess the following dimensions of information:

(1) Company background: including compliance, legal, financial, and other aspects.

(2) Repayment history: Currently, only repayment history in TrueFi is available. In the future, it will be expanded to more data sources.

(3) Operation and transaction history: including trading data in both the crypto and traditional financial fields;

(4) AUM: including size, asset types, and custodians;

(5) Credit indicators: including leverage ratio, liquidity, and risk exposure, etc.

Although this set of credit rating models will continue to integrate data from centralized trading platforms and more on-chain data in the future, the framework of the entire rating system currently resembles a traditional bank lending model, except that it integrates data from both the crypto and traditional fields and turns the borrowed funds into digital currency.

Currently, 33 companies (such as Amber Group, Alameda Research, etc.) and two large borrowers (0x819, 0xB60) have become "qualified borrowers".

During the loan approval process, there are two stages: (1) TRU stakers Voting and (2) Rating Committee Voting.

TRU holders have the right to vote on each loan after staking. For any loan to be approved in the voting round, it needs to receive more than 15 million votes, with at least 80% voting "YES". After the "TRU stakers Voting" is passed, the Rating Committee will make the final decision on whether to issue the loan.

The loans issued through TrueFi DAO Pools are all fixed-rate and fixed-term credit loans.

3.3.2 TrueFi Capital Markets

Source: https://app.truefi.io/home

TrueFi Capital Markets is still a credit lending business, with the key difference from TrueFi DAO Pools being the manager. The manager of TrueFi Capital Markets is a third-party institution, which includes two types of pools: Managed Portfolios and Lines of Credit.

For Managed Portfolio, the first step is to review the qualifications of the "Manager". The application process for this step is similar to the process for "Qualified Borrowers" in TrueFi DAO Pools, but it also requires a description of the strategy and requirements for the portfolio being prepared, as well as details on whether TRU incentives will be applied for. The final decision on the review of the "Manager" is made by TrueFi DAO.

After confirming that "Manager" meets the admission threshold and that the "portfolio" requirements are appropriate, the initiator "Manager" can establish a special loan product. Like TrueFi DAO Pools, borrowers of special loan products still need to complete two audits: "Qualified Borrower" and "Loan Application". Some details in the "Loan Application" can be negotiated with the "Manager" and do not have to be the same as TrueFi DAO Pools.

For investors in Managed Portfolios, this type of product is like a fixed-term wealth management product, and assets can only be redeemed upon maturity. Additionally, portfolio tokens obtained cannot be transferred to other addresses. Furthermore, each Managed Portfolio has two types of fees: (1) Protocol fee, the proportion of which is not fixed and varies among different borrowers, currently all within 0.5%. This fee will be transferred to the TrueFi Protocol Treasury upon product maturity; (2) Portfolio fee, the proportion of which is not fixed and is still negotiated on a case-by-case basis. This fee will be transferred to the Manager's wallet address upon product maturity. The "Manager" of the Managed Portfolio can also design the admission threshold for investors, and such investors need to undergo KYC.

Using the following image as an example, "Manager" refers to "TrueTrading", "Max Portfolio Size" is 100 million USDC, and investors must be KYC users. The Protocol Fee is 0.01%, the Portfolio Fee is 0%, and the current "Total Portfolio Value" is 7.44 million US dollars. The expected APY is 9.58%.

Source: https://app.truefi.io/portfolios/mainnet/0x3eabf546fff0a41edaaf5b667333a84628571318

On July 14th, TrueFi announced a partnership with Woo Network, with WOO DAO providing WOO tokens for credit lending to TrueFi's institutional clients. This is TrueFi's first Managed Portfolio that is not a stablecoin. Interest will be injected into Woo DAO. These institutional clients need to complete Woo Network's KYC process, and the WOO they receive will only be deposited into the WOO X wallet and traded on the WOO X platform.

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Lines of Credit is a type of credit loan initiated by the borrower, but with some differences: this type of pool only lends to a single borrower, and the interest rate is no longer fixed, but determined by a pricing formula related to the utilization rate of funds. After setting up Lines of Credit, the borrower also needs to pay a 0.5% Protocol Fee to the TrueFi Protocol Treasury, and may also pay a Portfolio Fee.

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3.4 Multi-Chain Deployment

On June 9th, TrueFi announced its deployment on Optimism, with the first product being the Perpetual Protocol Portfolio, with a maximum size of $5.025 million and currently at $1 million. This marks the beginning of TrueFi's multi-chain strategy.

Source: https://app.truefi.io/portfolios/optimism/0xa8c2f1571785007c9b5ff039957173e82a48768d

(Note: The content contains HTML tags and a hyperlink, which should not be translated. Therefore, the translation is provided only for the non-HTML text.) Translation:

来源：https://app.truefi.io/portfolios/optimism/0xa8c2f1571785007c9b5ff039957173e82a48768d

Translation:

Source: https://app.truefi.io/portfolios/optimism/0xa8c2f1571785007c9b5ff039957173e82a48768d

Overall, Ethereum remains the main platform for business development. As of August 4th, the current TVL of 309 million US dollars has 308 million US dollars on Ethereum.

3.5 Breach Response Strategy

When a default occurs, TrueFi's response strategy is to first let SAFU (500 million TRU from the official) and TRU stakers absorb the losses. If it is still not enough to fill the bad debt, the depositor will need to bear the remaining default losses. Then, the entire value of the loan will be written off and a lawsuit will be initiated against the defaulting debtor. If the lawsuit successfully recovers the loan, the funds of the borrower, stakers, and SAFU will be restored.

On June 7th, 2022, TrueFi Foundation, registered in the British Virgin Islands, was established to represent TrueFi DAO and exercise rights such as pursuing debt default after it occurs.

3.6 Business Data

(1) Total amount of credit loans issued

As of August 4th, TrueFi has issued a total of $1.68 billion in loans, of which $1.41 billion have matured and $270 million are outstanding.

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(2) Expired loans

TrueFi has a total of 122 loans that have matured, with a total amount of 1.41 billion US dollars, an average size of 10.984 million US dollars per loan, an average interest rate of 10.5%, and an average term of 68 days. Among them:

Source: https://app.truefi.io/loans

TOP 5 borrowers borrowed a total of $1.01 billion, accounting for 71.6% of the total loans, with a high concentration.

(3) Credit loan balance

There are currently 14 outstanding loans with a total value of 260 million US dollars, an average value of 18.81 million US dollars per loan, and an average term of 126 days.

其中：(其中: is not translated)

There are a total of 8 loans with a value of 130 million US dollars that will expire in the remaining time of August (for the risk of these loans, please refer to section 3.2: Project Competitive Advantages and Moat-Risk Assessment Model).

9月到期1笔，价值1000万美元；

Translation:

One due in September, valued at $10 million;

10-month maturity of 4 transactions, worth 120 million US dollars.

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（4）TVL & Utilization Ratio

The current TVL is around 320 million US dollars, with an ATH of 1.22 billion US dollars, and has now fallen by 73%.

The current utilization ratio is 94%, and it has been maintained at above 90% in recent times.

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(5) Total Revenue and Bad Debt Ratio

So far, TrueFi has earned $29.85 million in interest income for investors and maintained an excellent performance with 0% bad debt rate.

Overall, it is expected that with the rapid reduction of arbitrage opportunities in the market and the concentration of loans due in August, TVL and revenue data may experience a significant decline in the future.

4. Team situation

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4.1 Overall Situation

According to LinkedIn data, TrueFi has a total of 78 employees, mainly composed of engineers, BD, IT, finance, and legal personnel. These members belong to TrustToken company.

Source: https://www.linkedin.com/company/trusttoken/people/

Source: https://www.linkedin.com/in/rafaelcosman/

Rafael Cosman is the founder and CEO of TrueFi. He graduated from Stanford University. Prior to founding TrueFi, he worked at Palantir Technologies and Google, and was a partner at Lightspeed Ventures. He then founded TrustToken and was primarily responsible for engineering operations. He has a good background in finance, engineering, and investment. It is worth mentioning that TUSD, a stablecoin, is another project of TrustToken, and in December 2020, ownership of TUSD was transferred to an Asian alliance in partnership with Tron.

4.3 Core Members

The members of the main business line have rich and profound backgrounds in their respective fields.

BD Director: Ryan Rodenbaugh, who has served as an investment analyst or consultant at multiple investment firms such as VM Capital and BlueRun Ventures, became the BD Director of TrustToken in 2018.

CIO (Chief Investment Officer): Bill Wolf, who has served as a partner at top traditional financial companies such as Goldman Sachs, HSBC, and Credit Suisse, joined TrustToken as an advisor in 2018.

CPO (Chief Product Officer): Ryan Christensen, who has served as a product manager and partner at companies such as Yahoo, Zynga, and AppNexus.

5. Financing Situation

TrueFi is one of the business lines of TrustToken, and past financing situations have been mainly focused on TrustToken.

In June 2018, TrustToken raised a total of $20 million from a16z crypto, BlockTower Capital, DHVC, Jump Capital, ZhenFund, Distributed Global, and GGV Capital to develop its asset tokenization platform and expand its legal, partnership, product, and engineering design departments.

In August 2018, TrustToken raised $8 million through ColinList.

The two rounds above sold a total of 26.75% of TRU tokens.

In August 2021, TrustToken, the parent company of TrueFi, raised a total of $12.5 million from a16z, Blocktower, and Alameda Research to expand TrueFi's business.

Section 3 Business Analysis

1. Industry Space and Potential

1.1 Classification

The track that TrueFi is in is the unsecured loan track. In addition to TrueFi, the main players in this track currently include Maple Finance, GoldFinch, Clearpool, and Atlantis Loans, but the latter few projects are not very large in scale.

In the traditional field, under the continuous upgrading of infrastructure such as regulatory laws and regulations, credit rating, and pricing theory, credit lending has become not only an important tool for enterprises to obtain financing, but also provides convenience for daily consumption of residents. Credit loans have become an important business branch in the traditional financial industry.

Currently, almost all lending markets in the crypto industry are collateralized loans. In order to increase capital utilization, different projects have made many attempts in collateralization rates, interest rate pricing, collateral assets, etc. From the perspective of capital utilization, unsecured loans undoubtedly have the best capital utilization situation.

1.2 Market Size

The main customers of credit loans at this stage are market makers and quantitative trading institutions, mainly used for arbitrage, implementing market-neutral strategies, and market making. Especially in the bull market stage, there are plenty of low-risk arbitrage opportunities.

Using basic perpetual contract funding rate arbitrage as an example, there are many arbitrage opportunities for BTC in the bull market phase. According to Binance data, in the past 3 years, the annualized return rate of BTCUSDT perpetual contract without leverage can reach more than 15%.

Source: https://cryptoquant.com/asset/btc/chart/derivatives/funding-rates?exchange=all_exchange&window=DAY&sma=0&ema=0&priceScale=log&metricScale=linear&chartStyle=column

Source: https://www.binance.com/en/futures/funding-history/quarterly/1

From 2020 to August 2022, the daily average open interest of BTC futures was around 10 billion US dollars, and the funding cost generated by BTC perpetual contracts exceeded 1.5 billion US dollars per year.

Source: https://www.theblock.co/data/crypto-markets/futures/aggregated-open-interest-of-bitcoin-futures-daily

In addition, the market-making demand of both traditional market makers and liquidity pools in Dex has gradually been replaced by credit lending.

In the next 5 years, the TOP 5 market capitalizations will not stay at the level of 800 billion US dollars. The annualized return rate is higher for smaller currencies. Compared to the peak TVL total of less than 3 billion US dollars for the two main projects TrueFi and Maple Finance, the potential market capacity for perpetual contract funding rates arbitrage and market making is large enough.

2. Token Model Analysis

2.1 Token Total Supply and Allocation

TRU was issued in November 2020 with a total of 1.45 billion tokens. In February 2021, TrustToken, Inc burned a portion of the tokens, leaving a total of 1.44 billion remaining.

其中：(Note: "其中" means "among which" or "including")

39% is used for incentives, including TRU Staking, Lending, Sushiswap TRU-WETH Liquidity Providing, etc.;

26.75% is pre-sale;

18.5% attributed to the team;

11.25% belongs to the company or foundation.

4.5% belongs to future team members.

Source: https://blog.trusttoken.com/truefis-tru-token-economics-7facea6651c0

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Regarding the incentives for Lending and Sushiswap TRU-WETH Liquidity Providing, the current weekly reward is 1.94 million TRU with an annualized yield of over 10%.

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Source: https://app.truefi.io/farm

By early 2023, there will be only about 350 million tokens left in incentive and less than 200,000 tokens belonging to future team members to be released. By 2025, all tokens will be fully released. Before the full release in 2025, the annual inflation rate of the circulating supply is around 20%.

Additionally, in order to ensure the stable operation of the project in the future, 5 million tokens originally scheduled to be released to the company in 2021 have been allocated to SAFU as insurance funds.

2.2 Token Value Capture

Only TRU tokens that are in staking can gain value capture capability.

After staking TRU, users can receive income from three aspects: (1) 10% interest income, which means TRU stakers can share 10% of the loan interest in TrueFi DAO Pools; (2) Protocol fee; (3) TRU incentive.

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Regarding TRU rewards, currently 125,000 TRU are rewarded daily to stTRU holders, with an annualized yield of approximately 19.92%. About 29.71% of circulating TRU is currently in a staking state.

Source: https://app.truefi.io/stake

Additionally, a total of 3.04 million US dollars in interest income and protocol fees were distributed to TRU Stakers.

Aside from TRU incentives and interest fee rewards, staking TRU also grants governance power, such as the ability to make adjustments to incentive programs.

Source: https://app.truefi.io/stake

2.3 Token Core Demand Party

Investors who are bullish on the credit lending track and TrueFi have a need to lay out their positions in this bear market. The credit track is still in its early stages, and it appears that TrueFi is the only large-scale target with sufficient risk control in this track. With the recent launch of multi-chain strategies and targeted credit lending projects, TrueFi's business scale is likely to grow rapidly after the emergence of on-chain arbitrage opportunities. Therefore, whether it is "lending/liquidity providing first and staking later" or "directly buying staking," both are good strategies at this stage.

For borrowers, holding a large amount of TRU can increase the likelihood of obtaining a loan. This is because each loan requires at least 15 million votes and 80% approval in a single vote, giving borrowers an incentive to participate in governance. At the current price of $0.093 per token, the cost of obtaining 15 million votes is approximately $1.4 million. With an annualized return of 15% from perpetual funding fees and an average borrowing cost of 11%, a loan amount of no less than $35 million can fully cover the cost of 15 million TRU tokens.

2.4 Token Model Summary

The future of Token revolves around how to do incentives well. As of July 2022, there are not many non-incentive tokens left to be released, and most of the future releases will come from incentive mechanisms. By incentivizing Lending and liquidity staking, the deposit side will still have a relatively strong appeal in the near future.

By allocating interest income to TRU stakers, the risk and return are matched, providing more incentive to review each credit loan. TRU stakers not only bear the pre-loan risk - they vote on which borrowers to support with credit - but also bear the post-loan risk - if there is a bad debt, TRU stakers are the first to suffer. In some tokenomics, only staking incentives are provided without profit distribution. TrueFi's high profit sharing ratio makes TRU holders more willing to participate in staking and voting, alleviating the situation of simply "staking and winning" in the past.

However, in the next 2 years, the ratio of newly released tokens to the total amount of circulating tokens at the beginning of the year will reach 20%. Coupled with the lack of arbitrage opportunities in the bear market and the weak demand for credit loans, TRU's price will face considerable pressure in the future.

Overall, the Token mechanism of TrueFi can unify the rights and responsibilities of relevant stakeholders, especially for Stakers who bear the risk of debt default and can also receive corresponding benefits. This will make Stakers pay more attention to the approval of each loan and actively participate in voting. However, there are also some problems in the token model: (1) The Token release cycle is too short, especially the company and the core team's Token will be released within this year, which may lack sufficient incentives in the future; (2) The required number of votes for loan voting may be too low, which may lead to the possibility of manipulation by borrowers, after all, the current amount of funds required to buy TRU is not high.

3. Project Competition Landscape

3.1 Basic Market Structure & Competitors

3.1.1 Current Competitors

Current credit lending projects in the market include Maple Finance, Goldfinch, Clearpool, and Atlantis Loans. In terms of business model and volume, Maple Finance is currently the main competitor.

Long-term, the core factors that credit loans consider are: scale, risk control ability, and risk pricing ability.

From the perspective of total distribution scale, there is no significant difference between TrueFi and Maple Finance. However, in terms of TVL, Maple Finance's TVL is $500 million, higher than TrueFi's TVL ($320 million), which reflects the difference in their ability to attract deposits. Since the deposit side of TrueFi and Maple Finance comes from ordinary users, anyone can lend assets. Therefore, the marketing and customer acquisition capabilities of the project party are important factors in determining the scale of credit loans during the up cycle. In this regard, Maple has an advantage:

First of all, Maple Finance is more active on social media, with more Twitter Spaces and various activities, which is conducive to promoting the project and attracting more deposits. Especially after the CeFi crisis in June, through Twitter Spaces, podcasts/interviews and other programs, the project's positioning and timely response to community issues were promoted. This may be one of the important reasons why Maple Finance's token price quickly rebounded to the level before the incident in this wave of rebound. From the number of tweets posted on Twitter, it can also be seen that Maple has posted a total of 2,895 tweets from 2019 to the present, while TrueFi has posted 4,180 tweets from 2017 to the present. Compared with TrueFi, Maple Finance's average number of tweets per year is about 25% higher.

Secondly, the yield is higher than TrueFi. One possible strategy is to mine customers with higher risks, which may be easier to attract more funds during the bull market. Maple Finance was launched in May 2021, later than TrueFi, but Maple has issued a total of $1.533 billion in credit loans, earning investors $33.88 million in interest, with a nominal yield of 2.21%; TrueFi has issued a total of $1.67 billion in credit loans, earning investors about $28 million, with a nominal yield of 1.67%. The difference in yield reflects the attraction of depositors with higher risk preferences and the mining of relatively high-risk borrowers. It may also be due to the high yield that we see a total deposit scale of nearly $700 million even after Maple defaulted.

Source: https://dune.com/scottincrypto/Maple-Deposits

Maple Finance incident: After the UST crash in May this year, it triggered a chain reaction in CeFi, and some investment institutions defaulted on their debts, including Maple Finance. On June 21, Maple Finance stated that there may be problems with depositors' withdrawals. On June 22, it updated that Babel Finance had borrowed 10 million USDC from Orthogonal Trading's USDC Pool, and was therefore affected.

Source: https://maple.finance/news/updates-on-celsius/

This time, the problem that was reflected is that Maple's risk control has encountered issues, and this may determine the life or death of the project. TrueFi has an advantage in this aspect.

Risk control capabilities can be divided into pre-loan risk control, in-loan risk control, and post-loan risk control. In the traditional financial industry, loan fraud can generally be divided into three situations:

(1) Using someone else's identity information to commit fraud;

(2) Use real personal information, but forge credit data, such as asset certificates and income certificates;

(3) Forging the use of funds.

For the first scenario, with the advancement of technology, it is now possible to achieve a certain degree of avoidance through real biometric information such as fingerprint and facial recognition technology, requiring the individual to personally handle and provide valid identification documents. There are already many response plans in the traditional financial industry.

For the second scenario, typically users are required to submit asset proof, income proof, credit reports, and credit officers conduct on-site visits periodically to conduct risk assessments with official endorsements.

Risk management measures for the first and second types of situations belong to pre-loan risk control in the encryption industry.

Regarding the third scenario, it usually involves specifying the use of funds, such as within one's own business system, where the payment method can be changed to credit loans after the user places an order to purchase goods.

Risk management measures for the third type of situation belong to in-loan risk control.

Once a credit default occurs, traditional financial institutions will use methods such as collection, legal proceedings, and selling asset packages to non-performing asset disposal institutions to recover the funds. As the final punishment mechanism falls on the specific individuals or companies, this set of models can generally ensure that the credit default rate of the traditional financial system is at a relatively low level, and potential defaults are covered by a higher level of interest rates.

Regarding risk management measures for default disposal, it belongs to post-loan risk control.

In the credit lending field of Crypto, it is currently impossible to achieve a complete closed loop of "pre-loan, during loan, and post-loan" purely on the chain, because if there is a default, it can only be handled off-chain. Since the demand for credit is often from crypto-native investment institutions, which are not subject to regulatory constraints, there are no clear requirements for the use of funds and leverage, and it is even more difficult to clarify the "off-balance sheet financing" and the actual use. Therefore, lending institutions not only need off-chain prosecution rights, but also on-chain analysis and information collection capabilities.

TrueFi has not experienced any defaults so far, while Maple Finance has received loans from Babel Finance. Maple Finance's credit evaluation system still needs improvement, which will determine the project's ultimate fate.

The ability to price risk is related to the spread. This latest default at least indicates that the current spread may still not be sufficient to cover potential risks, and Maple Finance needs to further modify its pricing model.

3.1.2 Potential Competitors

Credit DID or potential competitors in the future. In Vitalik's "Decentralized Society: Finding Web3's Soul" article, soulbound tokens (SBT) were mentioned. If a credit evaluation system connecting crypto and the real economy can be established through SBT, this type of project is likely to be another S&P Global Ratings, Sesame Credit, or FICO Score, making it easier to enter the credit loan field, which will threaten the realization of TrueFi's long-term vision.

However, TrueFi's credit evaluation system also includes on-chain data, forming a more comprehensive evaluation plan. With the enrichment of on-chain data dimensions in the future, TrueFi may not necessarily lose to DID represented by SBT in competition.

3.2 Project Competitive Advantages and Moat

TrueFi currently has two core advantages:

Risk management measures. TrueFi DAO Pools and TrueFi Capital Markets both adopt a dual evaluation structure: first evaluate the borrower, then evaluate the individual loan, which draws on the risk control process of traditional financial systems. The credit loan's pre-loan approval evaluation can only be based on the data and information available at the time of approval, and the evaluation model cannot incorporate tail risks after the loan is issued. Therefore, risk management measures from the pre-loan, mid-loan, and post-loan stages of approval are very important. Since we cannot know the specific risk management model and parameters of TrueFi, based solely on the fact that TrueFi lent to Three Arrows Capital in May, it is possible that there were issues with its pre-loan risk control. However, this credit loan, which was originally due to expire in August of this year, was repaid early in June, indicating that TrueFi has an advantage in post-loan risk management. Only by helping TrueFi in selecting borrowers and loan conditions can it maintain a 0% bad debt rate. The concentration of loans due in August of this year may once again test TrueFi's risk control capabilities. Overall, among all outstanding loans, Alameda Research still needs to pay back $35.04 million, accounting for approximately 13%, Amber Group still needs to pay back approximately $65.86 million, accounting for approximately 1/4, and Wintermute still needs to pay back approximately $92 million, accounting for approximately 35%. In addition, debtors also include Bastion Trading, Folkvang, and others. However, the probability of remaining debts defaulting seems to be low for now.

Scalability of the business. TrueFi Capital Market leverages the customer acquisition capabilities and strategies of other projects and institutions, while outputting TrueFi's risk control capabilities. This business utilizes two advantages: (1) TrueFi's grasp of large-scale risk control; (2) After the Manager is established, it is necessary to excavate enough and high-quality borrowers to maintain the benign development of the business. As crypto moves towards mainstream audiences, the founding team's accumulation of resources in traditional finance, such as the work experience of several executives in the top financial field, also has the opportunity to be further introduced into TrueFi.

4. Risk

Competition from other projects in the credit loan track. Clearpool, a project in the same sub-track, has been running steadily and may survive and grow in this bear market. There are also differences in business models in the credit loan track, such as Goldfinch, which absorbs on-chain deposits and loans to off-chain merchants and can enter the small and medium-sized institutional credit market by honing its own risk control model.

Credit DID is gradually maturing and can also become the technical foundation of credit lending, breaking the exclusivity of the current risk control model. TrueFi's current risk control methods have a certain exclusivity. If DID becomes more mature and incorporates more data dimensions, there may be a possibility to enter the credit loan market, which may form a new risk control paradigm that is superior to TrueFi.

The tightening of regulatory measures in the crypto industry has led to a shrinking demand downstream. The collapse of stablecoin UST in this round has attracted the attention of major economic regulatory agencies, which may strengthen the regulation of stablecoin-related fields in the future, as well as strengthen the control of crypto fund investment behavior, balance sheets, and other aspects, which may affect the space of credit loan competition.

Section 4 Preliminary Valuation

1. Core Issues

(1) Market space.

Even if the total market value of cryptocurrencies remains at its current level, there is an annualized capacity of about hundreds of billions of dollars for perpetual contract fund arbitrage based on the top 5 non-stablecoin currencies, not to mention the market-making demand of centralized trading platforms and AMMs. If the narrative of Bitcoin as "digital gold" can ultimately be realized to some extent, and functional public chains such as Ethereum further mature, the market's demand for arbitrage and market-making will further expand. At present, the credit demand mainly comes from trading investment institutions and asset management companies.

(2) The cyclical nature of downstream demand.

Credit demand is a pro-cyclical demand. Currently, credit lending in the crypto industry is mainly used for financial activities such as market making and arbitrage. In particular, arbitrage is a relatively lagging demand, so the demand for credit lending may be more delayed. Therefore, projects like TrueFi may be strong cyclical targets.

From the perspective of current outstanding credit loans, the last application was made in June. In the foreseeable future, TrueFi's business may become increasingly bleak until the market emerges from the bear market bottom cycle.

Source: https://app.truefi.io/stake

(3) SBT and other mature alternatives to the TrueFi credit evaluation model

Web3 will not completely replace the credit system of Web2 and Web1, so the demand for "off-chain data as the main data and on-chain data as the auxiliary" will still exist at this stage. Moreover, TrueFi is gradually increasing its on-chain dimension, and the emergence of SBT will not immediately replace it. In addition, not all traditional world assets will be put on the chain quickly, and a pure on-chain DID may not be able to solve the default risk. The handling of such problems may still require off-chain assistance, so DID types like SBT may have limitations in application scenarios. TrueFi has already established the TrueFi Foundation for default risk litigation preparation. If the risk control measures based on entities and on-chain aspects can be utilized well, it may have more advantages.

2. Valuation Level

Given the strong cyclical nature of TrueFi's business, traditional valuation indicators such as PS and PE are likely to soar due to the cooling of the business in the near future. At the same time, TrueFi has not experienced a complete bull and bear cycle, and the historical indicators that can be referred to are not enough in terms of time dimension.

For investment in TrueFi, it may still be difficult to make a clear judgment based on the gradual recovery of the overall cycle and business volume. The following indicators can help us make a judgment:

(1) Forward-looking indicators of demand: perpetual contract funding rate, term spread, Gas Fee, and other indicators that can represent market activity.

(2) Scale indicators: TVL, Total Loans Outstanding;

(3) Risk control indicators: bad debt ratio;

(4) Profit indicators: Fees paid to stkTRU;

(5) Liquidity indicator: TRU collateralization ratio.

If the above indicators improve, the intrinsic value of the project will increase, especially the demand and scale indicators.

3. Preliminary Value Assessment Summary

Even from the perspective of downstream demand for arbitrage and market making, credit lending is one of the most promising tracks in DeFi. With the maturity of other infrastructure such as DID, the application scenarios and demand scale of credit lending will become more abundant.

TrueFi, regardless of the scale indicators such as TVL and loans already disbursed, or the ability to safely weather the CeFi/DeFi crisis, has become a highly competitive project in this field. Its main competitive advantages come from risk management measures and the scalability of future business.

The TrueFi team has extensive experience in traditional finance and can transplant their knowledge and experience in risk management into the project. Especially in the current stage where basic infrastructure such as credit DID and other on-chain risk management measures are relatively lacking, this experience and ability can help TrueFi deal with significant risk events. The recent collaboration with Woo Network also demonstrates that TrueFi is not confined to its own business scope and is willing to innovate products to meet customers' new needs under the premise of controllable risks.

From a valuation perspective, the strong cyclical demand for TrueFi downstream makes its valuation more similar to traditional cyclical stocks, and PE, PS and other indicators will further deteriorate in bear markets. In the future, if demand indicators and business scale indicators show signs of improvement, TrueFi may have more investment value, provided that risk control indicators do not deteriorate.

Section 5 References

1. Project Mechanism

https://truefi.io/

2. Project Data Dune:

https://dune.com/tt_tyler/tru-staking-burns

Dune:

https://dune.com/queries/636881/1186840

Linkin:

https://www.linkedin.com/company/trusttoken/people/

Uniswap: https://info.uniswap.org/#/pools/0xd7c13ee6699833b6641d3c5a4d842a4548030a82

3. Other Data

Dune:

https://dune.com/scottincrypto/Maple-Deposits

Translated:

https://dune.com/scottincrypto/Maple-Deposits

Binance:

https://www.binance.com/zh-CN/futures/funding-history/quarterly/1

Cryptoquant：

https://cryptoquant.com/asset/btc/chart/derivatives/funding-rates?exchange=all_exchange&window=DAY&sma=0&ema=0&priceScale=log&metricScale=linear&chartStyle=column

The Block:

https://www.theblock.co/data/crypto-markets/futures/aggregated-open-interest-of-bitcoin-futures-daily