Term Finance brings fixed-term lending protocol to Ethereum mainnet

Fixed-term lending protocol Term Finance is slated 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 commonly used in traditional banking.

Tri-party repo is a repurchase transaction involving three parties. In TradFi, security dealers will find short-term repos to manage both their own assets and their client’s assets. In the case of Term Finance, the security dealer will be replaced by smart contracts.

Billy Welch, the co-founder of Term Labs, the team behind Term Finance, told Blockworks its ability to scale fixed-term lending sets it apart from other fixed-term lending protocols.

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Many existing fixed-term lending protocols today utilize automated market makers and liquidity pools to originate fixed-term loans.

“From a borrower’s perspective, when you’re trying to borrow (for example) $500,000, $1 million, $2 million, there is significant slippage,” Welch said. “It’s not scalable for an institutional level user, then from [a liquidity provider] or lender’s perspective, you only make returns as borrowers interact against that pool. So your real returns are half a percent per year.”

Term Finance, on the other hand, uses a double-sided blind auction process where the protocol matches borrowers and lenders depending on how much they are willing to bid, Welch said.

“We conduct these auctions where borrowers and lenders can submit their bids and offers to borrow and lend over a period of time, and once the auction closes, we take the bids and offers and create a supply-demand curve,” Welch said. “Any borrower that’s willing to bid at or above the clearing rate gets a loan, and any lender willing to receive the clearing rate or less makes a loan.”

With this model, liquidity providers will not have to trap their liquidity in an automated market maker for an indefinite amount of time.

“All you have to do is lock it up for the period of when you submit your bid, if you get done in an auction you get a loan, and if you don’t you can take your tokens back and send it to another DeFi lending protocol and get variable rate lending in that capacity,” Welch said.

The first public auction on Ethereum mainnet will be a one-month loan maturing Aug. 31 on wstETH collateral borrowing USDC. The auction will begin at 11 am ET today, and interested participants will have 48 hours before Thursday at 11 am ET to place their bids.

“The long-term vision is we have a repo token maturing every week, every month, going out to one year. This can serve as a basis for a DeFi native benchmark yield curve,” Welch said.

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