Term Labs today launches its fixed-rate lending protocol on Ethereum. Term Finance is a milestone towards the development of a more mature crypto market, one with rules more familiar to TradFi lenders and borrowers than current Decentralized Finance (DeFi) protocols.
Variable rates are the current rule in DeFi, making it riskier for large professional portfolios to get on board.
Interest rates on protocols like Aave and Compound are calculated according to supply and demand. So, if a crypto whale deposits a boatload of funds into a lending pool, rates across the board will plummet in accordance with the abundance of supply, and vice versa.
The Term team channeled the U.S. Treasury for inspiration, specifically its auction calendar model, which matches borrowers and lenders who have set predetermined rates. The collateral is then locked up in a smart contract for the duration of the auction, aka the loan’s term.
Term Finance promises zero slippage—an occurrence where the expected price of a trade is different from the final price after the trade has been executed. It also promises no spread, which is when two listed prices (commonly buy and sell) are different.
In addition, the team hopes investors and traders will be lured by low fees and high-quality blue chip collateral like Bitcoin, Ethereum, and stablecoins by Circle and Tether
Back in February, Term Labs raised $2.5 million to build the lending platform. The funding round was led by Electric Capital and included contributions from Coinbase Ventures, Circle Ventures, Robot Ventures, and Mexc Ventures.
Term Labs turns to the future
Billy Welch, Term Labs’ co-founder confirmed with Decrypt that Term Finance will branch out into other blockchains and layer-2 solutions “shortly after” the first launch on Ethereum. While no dates were given, Welch said the protocol “will be multi-chain soon.”
The “most popular” lending and borrowing activities among the 2,000 testnet users and private mainnet beta was, according to Welch, borrowing stablecoins against liquid staking tokens (LSTs), in particular Lido Finance’s wrapped stETH.
People also borrowed Tether against USDC “as the borrowing rate on Tether can be very volatile” and, Welch says, borrowing ETH against LSTs will be a popular transaction “to enhance staking yields.”
The shortest duration of loan will be four weeks, but Welch envisions the 1- and 3-month loans will be the most popular, although the protocol hopes to eventually host terms of a year or more.
“We are focused on borrowing and lending in the highest quality blue chip on an overcollateralized basis or a loan-to-value ratio in line with Aave and Compound," Welch said. "The rates in our Beta ranged from low-to-mid 3% for borrowing stables against high-quality crypto assets. We expect other collateral types like wBTC to be popular. Over time, the protocol may expand to other assets as collateral or to supply and borrow but for now, we’re sticking to the majors.”