The term loan protocol Term Finance is set to launch on the Ethereum mainnet today.
The protocol enables non-custodial, fixed-rate lending with collateral using the tri-party repurchase or repo model common in traditional banking.
A tri-party repo is a repurchase transaction involving three parties. At TradFi, securities traders find short-term repo transactions that allow them to manage both their own assets and the assets of their customers. In term finance, the securities trader is replaced by smart contracts.
Billy Welch, the co-founder of Term Labs, the team behind Term Finance, told Blockworks that its ability to scale term loans sets Blockworks apart from other term lending protocols.
Many existing term lending protocols now use automated market makers and liquidity pools to issue term loans.
“From a borrower's perspective, there are significant differences if you want to borrow, say, $500,000, $1 million or $2 million,” Welch said. “It is not scalable for an institutional level user [a liquidity provider] From the lender's perspective, you only get returns when borrowers interact with this pool. So your real return is half a percent per year.”
Term Finance, on the other hand, uses a two-sided blind auction process in which the protocol matches borrowers and lenders depending on how much they are willing to bid, Welch said.
“We run these auctions where borrowers and lenders can submit their bids and offers for loans and advances over a specific period of time. Once the auction ends, we take the bids and offers and create a supply-demand curve,” Welch said. “Any borrower willing to bid at the clearing rate or above will make a loan, and any lender willing to bid at the clearing rate or less will make a loan.”
With this model, liquidity providers do not have to hold their liquidity in an automated market maker indefinitely.
“All you have to do is lock it for the period you place your bid. If you are successful at an auction, you will receive a loan, and if not, you can take back your tokens and send them to another DeFi.” “We can create a loan protocol and receive variable rate loans in that capacity,” said Welch.
The first public auction on the Ethereum mainnet is a one-month loan expiring on August 31st for WstETH collateral in USDC. The auction begins today at 11 a.m. ET and interested participants have 48 hours to place their bids before Thursday at 11 a.m. ET.
“The long-term vision is that every week, every month we have a repo token that matures up to a year. This can serve as the basis for a DeFi native benchmark yield curve,” said Welch.
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