The story of the fixed-rate protocol Term Finance began with a $2.5 million financing led by Electric Capital. At that time, in February 2023, it was launched during the DeFi spring boom. During that period, DeFi ushered in a wave of strong growth, and Term Finance quickly gained attention.
Term Finance introduces a new fixed-rate and fixed-term loan model to the DeFi ecosystem, filling the gap between centralized cryptocurrency lenders. You can think of it as providing a liquidity solution for the cryptocurrency market that allows you to participate without sacrificing.
During its rise, the tri-party repo model and periodic auction mechanism were adopted, which is a mature lending model in TradFi:
- Borrowers and lenders submit their respective bids and offers through a periodic auction contract.
- After the auction, the protocol matches borrowers and lenders using the market clearing rate.
- Borrowers who bid at or above the Clearing Rate are granted loans, and lenders who bid at or below the Clearing Rate are granted loans.
With Term, users can obtain liquidity for a fixed period without compromising on fees, slippage, custody or trust, bringing revolutionary changes to the DeFi field and in line with the emerging trend of yield optimization.
Innovating the TradFi model and building a new paradigm for DeFi
In Term's innovative mechanism narrative, liquidity takers submit bids and suppliers submit quotes to the protocol, which are aggregated at the end of the auction to determine the "market clearing rate." Bidders who bid higher than the clearing rate receive loans, lenders who bid lower than the clearing rate issue loans, and bids and quotes from other participants are called "pending."
Throughout the entire process, the two major agreement frameworks, the agreement contract and the regular repurchase contract, ensure the overall management and operation of the Term, as well as the smooth progress of all regular repurchases.
Among them, term repurchase contracts play an important role in specific functions, such as:
- Borrowers are required to provide sufficient collateral before borrowing, which is managed by a regular servicer contract group.
- During the entire lending cycle, the collateral is locked in TermRepoLocker.sol, ensuring that the borrower's lending behavior is constrained.
- Borrowers can choose to roll over or extend before maturity, but must maintain sufficient collateral value to avoid triggering liquidation.
The core operating logic is the mature Repo form Tri-party Repo model in TradFi, which involves three participants: lenders, borrowers and third-party agents, also known as the Tri-party Repo model. In the repurchase agreement, one party (usually a financial institution or government, i.e. the borrower) sells assets (usually fixed-income assets, such as government bonds) to another party (i.e. the lender) in name, and agrees to repurchase at a specific price on a certain date in the future; the third-party agent is responsible for managing all aspects of the transaction, including asset liquidation, collateral management and settlement after the loan expires. After the loan expires, the borrower needs to repurchase the assets at the agreed repurchase price and pay the corresponding interest; the third-party agent will be responsible for handling all of this to ensure the smooth completion of the transaction.
On-chain “current market”
In addition to Tri-party Repo, the auction mechanism is also one of Term's current killer features.
The decentralized Term Finance protocol actually acts as a third-party agent in TradiFi. The borrower's collateral assets are locked in a smart contract (Term Repo Locker), which can be verified in real time by both the borrower and the lender. The Term Finance protocol monitors the health of the collateral and handles liquidation. The entire process covers sealed bids, second-highest bid auctions, single auctions, and single-price double auctions, but in either case, they are matched according to the clearing rate. By processing multiple orders within a predetermined time, the double auction increases liquidity and reduces transaction costs.
It is worth mentioning that for lenders, it can be regarded as submitting an offer to purchase Term Repurchase Agreement tokens.
Therefore, compared with mainstream DeFi protocols, the value of Term is well demonstrated: on the one hand, it can ensure that borrowers and lenders will not borrow at a rate higher than the predetermined maximum interest rate or lend at a rate lower than the minimum interest rate, bringing unprecedented stability and transparency to the cryptocurrency market; on the other hand, an auction mechanism is used to determine the lending rate, which is matched through the market clearing rate. All unmatched bids and quotations will be returned to ensure efficient use of capital, while at the same time effectively avoiding slippage and interest rate fluctuations.
In addition, in order to ensure the long-term stability and security of the protocol, Term also adopts OpenZeppelin's UUPS proxy mode: the actual smart contract code is managed through the proxy contract to facilitate upgrades and maintenance. This design allows smart contracts to be upgraded and securely repaired without redeploying the entire system. At the same time, the most sensitive protocol management operations are handled by Gnosis Safe, and the security and transparency of all operations are ensured through the Zodiac Delay Modifier.
As we head into 2024, there is a clear upsurge in the entire cryptocurrency and DeFi industry.
In the current market, "liquidity" has become an important driving factor, and platforms like Term Finance are leading the way with their liquidity solutions that allow participation without sacrifice. This approach has not only rekindled interest, but also shaped the dynamics of the market. At the same time, the diversity of on-chain asset types is expanding, which increases the depth of the DeFi ecosystem and is bound to become fertile soil for the long-term value of Term Finance.
