TermMax describes its physical delivery mechanism in plain terms: when there's no liquidity to liquidate collateral, lenders get the borrower's collateral instead. Read that alone and it sounds like a backstop. Then I checked @TermMax $TMX Risks docs for #TermMax and found narrower wording: physical delivery "mitigates" shortfall risk — it doesn't remove it.
The gap sits in the liquidation formula itself. TermMax caps how much collateral can be pulled from a defaulted position at a fixed maximum, built to stop borrowers from being over-liquidated. If a fast market move leaves that capped collateral short of what's owed, lenders receive a proportional share of what remains, not their full position back.
What changed for me was seeing the technical Risks page frame this more cautiously than the general product description does. Security here isn't an insurance-style promise — it's bounded loss-sharing, closer to how a clearinghouse haircuts positions in a fast market than how "collateral delivered as compensation" reads on its own.
Worth checking next: how often that liquidation cap has actually bound during real volatility, and what proportional payout lenders received relative to their original position.