WHEN LIQUIDATION ISN’T ENOUGH: HOW TERMMAX PHYSICAL DELIVERY WORKS
A collateralized loan sounds simple: if a position becomes risky, the protocol liquidates collateral to repay the debt. But what happens when market volatility or weak liquidity makes full liquidation impossible?
In TermMax, each fixed-rate market has an LLTV threshold. When a position’s LTV reaches that level, it may be liquidated. If the borrower still cannot fully repay, fixing the interest rate does not remove the remaining credit and collateral risk.
This is where physical delivery matters.
Instead of assuming collateral can always be sold quickly at a fair price, TermMax can distribute the remaining underlying assets and collateral to FT holders when the debt is not fully resolved.
Imagine a debt worth 1,000 units. Under normal conditions, collateral is sold to recover value for lenders. But if only part of it can be liquidated efficiently, forcing the rest into a thin market could create even worse execution. Physical delivery allows the remaining assets to be passed to FT holders instead.
The benefit is clear: the system does not rely entirely on perfect liquidation conditions.
But there is a trade-off. FT holders who expected a predictable fixed-rate payoff may receive collateral instead of only the asset they originally expected. They then take on price risk, liquidity risk, and possibly a longer exit process.
So fixed rate and physical delivery solve two different problems. Fixed rate makes borrowing costs or returns more predictable. Physical delivery addresses what happens when liquidation cannot fully close the position.
That distinction is important, because in DeFi, risk often becomes most visible when markets stop behaving normally.
@TermMax #TermMax $CYS $ONG $BMT
A collateralized loan sounds simple: if a position becomes risky, the protocol liquidates collateral to repay the debt. But what happens when market volatility or weak liquidity makes full liquidation impossible?
In TermMax, each fixed-rate market has an LLTV threshold. When a position’s LTV reaches that level, it may be liquidated. If the borrower still cannot fully repay, fixing the interest rate does not remove the remaining credit and collateral risk.
This is where physical delivery matters.
Instead of assuming collateral can always be sold quickly at a fair price, TermMax can distribute the remaining underlying assets and collateral to FT holders when the debt is not fully resolved.
Imagine a debt worth 1,000 units. Under normal conditions, collateral is sold to recover value for lenders. But if only part of it can be liquidated efficiently, forcing the rest into a thin market could create even worse execution. Physical delivery allows the remaining assets to be passed to FT holders instead.
The benefit is clear: the system does not rely entirely on perfect liquidation conditions.
But there is a trade-off. FT holders who expected a predictable fixed-rate payoff may receive collateral instead of only the asset they originally expected. They then take on price risk, liquidity risk, and possibly a longer exit process.
So fixed rate and physical delivery solve two different problems. Fixed rate makes borrowing costs or returns more predictable. Physical delivery addresses what happens when liquidation cannot fully close the position.
That distinction is important, because in DeFi, risk often becomes most visible when markets stop behaving normally.
@TermMax #TermMax $CYS $ONG $BMT