Term Labs has turned heads with its fixed-rate offering, landing $2.5 million to bring the product to market.
Led by Electric Capital, the latest round was also joined by Circle Ventures, MEXC Ventures, Coinbase Ventures, and angel investment from a host of DeFi founders. The fresh funds will be used to build out the team’s Term Finance protocol.
DeFi has been plagued by variable rates for some time, making it difficult for larger, professional portfolios to enter the market.
Rates on popular DeFi protocols like Aave and Compound generate their rates as a function of supply and demand. This means that if a large whale in that protocol deposits a huge amount of funds into a lending pool, rates across the board would plummet. If that same entity were to borrow those funds, then rates to borrow would skyrocket.
Conversely, generating loans from centralized players, such as Genesis, has proven equally risky. Still, as Term Labs co-founder Dion Chu told Decrypt, it’s a massive market. Prior to filing for bankruptcy this year, Genesis generated $8.4 billion in loans in Q3 2022.
Making DeFi scalable
“There's a massive market there. The DeFi solution before wasn't scalable. The CeFi solution is not secure. So, we're trying to bridge that gap and bring a scalable and secure solution that is native to the blockchain,” Chu said.
Though Term Finance is going crypto-native, the team has drawn inspiration from the U.S. Treasury— specifically, its auction calendar—to find and match borrowers with lenders. Lenders on Term can set their rates, the amount their willing to part with, as well as the duration of the auction. Likewise for borrowers.
Once submitted, the asset users have made available to borrowers or put up as collateral is locked into a smart contract for the duration of the auction.
For now, the team will launch with a variety of stablecoins like USDC and USDT, as well as more volatile assets such as Ethereum, Wrapped Bitcoin, and Wrapped Staked Ethereum as well.
“The vision here is that steady state will have a token maturing every week, every month, going out to one year. And this will form the basis of sort of a benchmark-defined yield curve,” Chu told Decrypt.
Billy Welch, another Term Finance co-founder, explained that there’s been interest in this product from various types of funds looking for secure access to stable yield like what his team is building out.
“We've been speaking to a lot of liquid token funds or DeFi funds that have excess stablecoins, that would be lenders in the protocol,” Welch told Decrypt. “Market makers as well, we expect them to be a user of the platform to fund yield opportunities, as well as basis trading in DeFi.”
In terms of rollout, the first iteration will be permissionless for all users, but the team will eventually launch a “sandbox version” for institutions, said Chu.