#termmax @TermMax Most lending protocols handle a liquidation that can't fully clear in one of two ways. Either the bad debt gets socialized across the whole lending pool, quietly diluting everyone's return, or the protocol keeps auctioning collateral at worse and worse prices until someone takes it. TermMax picked a third option, and I think the reasoning behind it is more interesting than the mechanism itself.
When a loan on TermMax passes its maturity date without repayment, liquidators get a two-hour window to close the position, earning a 5% reward on the liquidated debt value while a 10% protocol penalty applies against the borrower. If that window closes and the position still isn't fully liquidated, usually because the collateral is thin or volatile enough that nobody wants to buy it at the required price, physical delivery takes over. The lender receives the actual collateral asset instead of the debt token they're owed.
Why design it this way rather than extending the auction indefinitely or spreading the loss across a shared pool? Because TermMax's markets are isolated by design, one collateral type paired with one debt type per market. Socializing a loss would mean pulling value from lenders who chose a completely different market and never took on that specific collateral's risk. Physical delivery keeps the consequence contained to the people who actually opted into that pair, which fits the isolated-market philosophy TermMax uses everywhere else.
The tradeoff is obvious once you sit with it. A lender who wanted stablecoin exposure can end up holding a volatile token instead, and that's a real cost even if it's a fair one given the alternative. TermMax hasn't published much on how often physical delivery actually triggers in practice, and that number would tell me a lot more about how theoretical this fallback is versus how often people actually end up living it.
$BTW
When a loan on TermMax passes its maturity date without repayment, liquidators get a two-hour window to close the position, earning a 5% reward on the liquidated debt value while a 10% protocol penalty applies against the borrower. If that window closes and the position still isn't fully liquidated, usually because the collateral is thin or volatile enough that nobody wants to buy it at the required price, physical delivery takes over. The lender receives the actual collateral asset instead of the debt token they're owed.
Why design it this way rather than extending the auction indefinitely or spreading the loss across a shared pool? Because TermMax's markets are isolated by design, one collateral type paired with one debt type per market. Socializing a loss would mean pulling value from lenders who chose a completely different market and never took on that specific collateral's risk. Physical delivery keeps the consequence contained to the people who actually opted into that pair, which fits the isolated-market philosophy TermMax uses everywhere else.
The tradeoff is obvious once you sit with it. A lender who wanted stablecoin exposure can end up holding a volatile token instead, and that's a real cost even if it's a fair one given the alternative. TermMax hasn't published much on how often physical delivery actually triggers in practice, and that number would tell me a lot more about how theoretical this fallback is versus how often people actually end up living it.
$BTW