On-chain lending protocol Timeswap: fixed term, fixed income, and LTV that changes according to market demand

PANews · 2022-11-16T08:25:00.000Z

Written by: grace Compiled by: Shenchao TechFlow People who have been following Timeswap for a while already know how it differs from AAVE, but I wanted to explain it to newcomers. AAVE is a continuous, variable return product. Meaning, you can borrow money without a maturity date, think of your savings account. Timeswap is a fixed-term, fixed-income product, such as a time deposit (FD). AAVE has MAI, a decentralized stablecoin designed by Qi Dao that can be used for lending, as does Timeswap. MAI can be borrowed on AAVE at 3%, as the interest rate is not fixed. It may change based on utilization (borrows/total borrows).

Written by: grace
Compiled by: TechFlow
Those who have been following Timeswap for a while already know the difference between it and AAVE, but I still want to explain it for newcomers.
AAVE is a continuous, variable yield product. Meaning, you can borrow and lend without a maturity date, think of your savings account. Whereas Timeswap is a fixed-term, fixed-yield product, like a fixed deposit (FD).
AAVE has MAI, a decentralized stablecoin designed by Qi Dao, which can be used for lending, as does Timeswap. MAI can be borrowed on AAVE at 3%, and the interest rate is not fixed. It may change based on utilization (borrowed/total borrowed).
Higher utilization equals higher interest and vice versa.
The fundamental reason for borrowing is: leverage, the ability to buy without actually selling anything. Therefore, while leveraging leverage, it is also important to consider collateral, i.e., assets locked up. In more advanced terms, this is called LTV (Loan-to-Value Ratio).
Simply put, 75% LTV -> Collateralize $100, borrow $75. Higher LTV means higher leverage, and vice versa.
AAVE has a 75% LTV to MAI, investing $100 worth of any asset (ETH/USDC) will get you $75 worth of MAI.
Before I dive into Timeswap, it’s important to look at liquidations.
First, every loan on AAVE must be overcollateralized ($100 of collateral for a $75 debt), which is necessary because these products do not verify the creditworthiness of borrowers.
Along these lines, if, say, there is a volatile collateral and its value drops below $100, then the product that lends $75 must also protect its lender from the borrower defaulting.
Therefore, a liquidation function is embedded in the design of AAVE, and the product will be liquidated if the borrower’s collateral falls below a certain threshold, namely the liquidation threshold.
If the $100 worth of collateral falls below/reaches $80, it is sold to protect the lender’s $75 deposit.
Back to Timeswap, loans are non-liquidable, meaning that no matter how much collateral there is, it will not be sold, so there is no liquidation threshold or penalty.
Timeswap is unique in that it enables borrowers to repay their loans before they mature, or they default.
MAI can be borrowed on Timeswap with an APR below 1% and a 132% CDP: $100 worth of MAI can be borrowed with $132 worth of collateral, i.e. stMATIC.
For rough comparison, Timeswap’s LTV (loan-to-value) is 75% (100/132), the same as AAVE. The best part is: Timeswap’s LTV varies based on borrowing demand.
Think about it, Timeswap borrowers can borrow as much MAI as they want on Polygon at the lowest interest rate possible without worrying about their collateral falling in the market.
More importantly, CDP/LTV changes based on market forces (supply and demand), unlike other DeFi money markets.
In theory, a sound system is good for everyone involved, in this case, lenders and borrowers.
Lending is one of the best forms of earning real yield in DeFi, and therefore is adopted by many users.
Even though the current lending/borrowing funds on Timeswap will expire in the next 6 days, it provides sweet, organic, double-digit returns on MAI, the best of all.
Timeswap isn’t the best DeFi money market, but it’s leading. I think there’s nothing more secure than exchanging tokens with a time limit.