What is the Term Finance Protocol and what is its mechanism?

Bittime -  Term Finance Protocol is an on-chain lending platform that allows users to borrow or lend crypto assets at fixed interest rates on a non-custodial basis. 

This means that all transactions are carried out directly on the blockchain without intermediaries or third parties. 

This protocol adopts the tri-party repo concept that has long been used in traditional finance (TradFi). With this mechanism, lenders and borrowers can meet in a safe, transparent and efficient system to obtain loans for a certain period.

How Does the Term Finance Protocol Work?

1. Term Repos

The basic concept of Term Finance is Term Repos, namely collateral-based loans that have a fixed interest rate and a certain tenor. All loans and returns are made on-chain, minimizing the risk of manipulation and increasing transparency. Borrowers must deposit assets as collateral to get a loan.

2. Term Auctions

Determining interest rates in this protocol is done through a unique auction process, called Term Auctions. Borrowers will submit sealed bids in the form of the maximum interest rate they are willing to pay. On the other hand, lenders provide sealed offers with the minimum interest rate they are willing to accept. The protocol will process all bids and offers to determine the market-clearing rate — the interest rate that reconciles supply and demand in the market.

3. Settlement and Lending Process

After the auction is complete, borrowers who bid above the clearing rate will receive loans, while lenders who bid below the clearing rate will lend their funds. All transactions that do not meet these criteria will be “left on the table” or not processed.

4.Term Repo Tokens

Lenders will receive Term Repo Tokens in the form of ERC-20 tokens as proof of loan participation. This token can be exchanged again at maturity to get the principal plus interest according to the clearing rate determined at the time of the auction.

5. Smart Contract Function

All activities in the Term Finance Protocol are executed by smart contracts, including recording repayments, monitoring collateral health, and executing liquidations if collateral falls below specified limits. It provides complete security and transparency for all users.

6. Advantages of Term Finance Protocol

Term Finance Protocol offers efficiencies and transparency that are difficult to achieve in traditional financial systems. The closed auction process allows interest rates to form naturally without manipulation. In addition, smart contracts eliminate the role of third parties, reduce costs and minimize risks.

Also read: What is MegaETH Airdrop and How to Join?

Conclusion

Term Finance Protocol is an important innovation in the DeFi ecosystem by introducing a fixed-interest, secure and transparent lending mechanism. By adopting TradFi's tri-party repo model and implementing closed auctions, this protocol provides market efficiency and on-chain security for both lenders and borrowers.

Also read: Get to know ChainSwap Token (CSWAP) and its Roadmap

FAQ

1. What is Term Repo Token?

Term Repo Tokens are ERC-20 tokens that lenders accept as proof of a loan, which can be exchanged to obtain principal and interest at maturity.

2. How are interest rates determined?

Interest rates are determined through Term Auctions, where borrowers and lenders submit closed bids and offers. The protocol sets a clearing rate based on the offer.

3. Are there any risks in Term Finance Protocol?

Key risks include a decline in the value of the collateral which could trigger liquidation. However, smart contracts monitor and execute automatic liquidations to protect banks.

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Reference

Docs Term Finance, Introduction to Term Finance, accessed March 25, 2025.

Author: MF