DeFi’s variable rate loans, which can swing rapidly during crypto’s frequent liquidity events, are shielded from borrowers via term financing.According to a weekly auction model, neither borrowers nor lenders will ever borrow at an interest rate higher than their maximum cap or lower than their minimum cap.The Ethereum mainnet now supports Term Finance, a decentralized finance (DeFi) protocol that provides short-term, fixed-interest loans.
According to Dion Chu, CEO of the platform’s creator Term Labs, the protocol aims to close the gap between centralized crypto lenders and also provide customers with an alternative to variable rate borrowing.The multiple notable breakdowns that occurred last year have had a negative impact on centralized finance.The DeFi industry, which is controlled by companies like Aave and Compound, has remained mostly unfazed in comparison.
Aave and Compound are sort of “DeFi banks,” Chu said, with a kind of “ultimate liquidity.” Meanwhile, Term Finance operates more like certificates of deposits, where users agree not to withdraw for a specified length of time. “They’re both kind of necessary primitives in DeFi. So Aave and Compound can always play the role of being a DeFi bank, and we hope to fill this role of short term, fixed rate liquidity,” he added.
Due of its familiarity with automated market makers (AMMs), Term Finance, which secured a $2.5 million seed round in February, is also introducing auction methods to the DeFi area. Once-weekly auctions ensure that both lenders and borrowers will never borrow at an interest rate that is higher than their maximum cap or lower than their minimum cap.
“What you’re doing is batching liquidity,” Chu said. “Because an AMM is ongoing, continuous liquidity, everything’s done asynchronously and it can take some time before it finds equilibrium, and there’s a little bit of a gaming aspect there. This type of batching of liquidity is good for nascent markets, and it’s very common. If you think about the New York Stock Exchange, it actually started as the daily auction, so it wasn’t a continuous market, as we know now.”