This idea describes a path forward for Purple to become a first “nounish” DAO to issue it’s stablecoin denominated “Treasury Bonds” to the community. Think RWA are cool? I say BWA (“builder world assets”) are way cooler! :D
How does it work?
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Purple deploys the BORROWING POOL and defines interest rate curve. [PROP NEEDED]
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Lenders deposit into the pool.
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Purple decides to borrow from the POOL [PROP NEEDED]. Only after this action interest start to accrue.
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Interests accrue to all LP token holders ($PURPLE_BOND holders) but DAO pays interests for the funds borrowed.
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Purple decides to pay back into the POOL [PROP NEEDED]
Why would Purple want to borrow?
One might argue that in the bear market, it might not make sense for PurpleDAO treasury to sell off their ETH. The alternative would be to get a stablecoin line of credit from the community, to be used when needed and repaid when needed. Borrowed funds might be used to fund DAO contributions while benefiting from exposure to ETH during future bull market.
Where is the yield coming from for lenders?
Purple is a source of yield. The assumption is it will aquire more ETH during upcoming months and years and will have funds to pay back the loan with small interests. It is a typical “Credit” model. Purple is literally issuing its own “Treasury Bills” :)
Implementation
This sort of mechanism should have some important attributes:
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Should be onchain
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Should be permissionless and immutable
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Smart contracts should be audited
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Should have great UI for lenders
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Lenders should receive an ERC-20 / ERC-4626 yield bearing token in return for their deposit
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POOL should have a max size
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POOL should have a finite term (a.k.a 1year, 2year etc)
Enter “Line of Credit” protocol..
Fortunately all of it is already out there - ready to be used out of the box. I have been one of the authors and involved in creation of Lines of Credit protocol by TrueFi DAO, which is a fully on-chain, non-custodial mechanisms for the creation of reputation-based credit lines.
Below you can find a detailed description of how the protocol works.
Docs: Lines of Credit - TrueFi Docs 1 Technical Details: https://docs.truefi.io/faq/truefi-protocol/automated-lines-of-credit/lines-of-credit-technical-details
Details
Collateral requirements
There are no collateral requirements. This product is solely based on the on-chain reputation of PurpleDAO and its community. Lenders are aware of this and are making an informed choice. PurpleDAO, when defining the “yield curve,” takes this into consideration.
Costs for Purple
PurpleDAO is NOT paying for being able to have this Line of Credit, and not paying any interests until the separate vote to trigger borrowing happens.
PurpleDAO votes to borrow an amount from the pool of funds deposited by LPs. Interests are being paid only from the amount borrowed at any time.
→ Example parameters
Line of Credit owner: PurpleDAO
Token: $DAI or $USDC
Lenders: Purple Community, broad crypto community
Max size: $15k
Borrow APY at 80% utilization: 5%
Lender APY at 80% utilization: 4%
Line of Credit LP token: $PURPLE_BOND
FAQ
What is the cost to deploy the line of credit?
Just the cost of gas.
Will there be any liabilities / costs for Purple based on the fact that LPs deposited the funds into the pool?
No. Interest accrual is being turned on only for the funds explicitly borrowed by PurpleDAO.
What is the fee model of TrueFi protocol?
TrueFI DAO proposes 50bps (0.5%) annualized on Line of Credit TVL (accrued block by block). This could be negotiated.
Would not LP leave - if their capital is very slowly eroding when PurpleDAO is not borrowing?
Yes. This product makes sense only when PurpleDAO intends to borrow. This should be planned and announced so lenders can join with their capital. Another tool to manage available funds and liquidity is to configure interest rate curve to incentivize lenders to deposit on high utilisation.
Was this protocol audited?
Yes.
What tokens could the pool be demoninated in?
Protocol works with any type of non-rebasing ERC-20 token, could be any stablecoin or WETH, though I would argue stablecoins make more sense.
What is TrueFI?
TrueFi is a DAO responsible for building multiple protocols for uncollateralized lending, historically it had originated 1.7B worth of loans onchain. Line of Credit Protocol had been creating with DAOs in mind.
What’s next?
If there is enough interest/curiosity I am happy to set up the “prototype” on Optimism testnet for everyone to try out - how it would work.