DeFi Platform Term Finance Brings Fixed Rate Lending to Ethereum

Short term, fixed rate loans can now work in harmony with Aave and Compound's "ultimate liquidity" model.

AccessTimeIconAug 1, 2023 at 3:00 p.m. UTC
Updated Aug 1, 2023 at 4:54 p.m. UTC
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  • Term Finance protects borrowers from DeFi’s variable rate loans which can fluctuate wildly during crypto’s recurrent liquidity events.
  • A weekly auction model means borrowers and lenders will never borrow at more than their predetermined max interest rate or lend below their minimum rate.

Term Finance, a decentralized finance (DeFi) protocol that offers short term, fixed interest rate loans, has gone live on the Ethereum mainnet.

The protocol is trying to bridge the gap between centralized crypto lenders and also offer users an alternative to variable rate borrowing, Dion Chu, CEO of the platform's builder Term Labs, explained in an interview with CoinDesk.

Centralized finance has taken a hit, mainly due to the numerous prominent collapses last year. However, in contrast the DeFi sector, which is dominated by the likes of Aave and Compound, has remain largely unnerved.

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.

Term Finance, which raised a $2.5 million seed round back in February, is also bringing auction methodology to the DeFi space, accustomed as it is to automated market makers (AMMs). Carrying out once-per-week auctions provides certainty to borrowers and lenders, who will never borrow at more than their predetermined max interest rate or lend below their minimum rate.

“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.”

Edited by Parikshit Mishra.


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Ian Allison

Ian Allison is an award-winning senior reporter at CoinDesk. He holds ETH.

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