#termmax @TermMax Most lending protocols handle a bad loan the same way: sell the collateral, fast, into whatever liquidity exists, and hope the proceeds cover the debt. TermMax looked at that model and built something different for the moments it breaks down.
When a TermMax loan crosses its liquidation threshold, liquidators get a two-hour window to step in, take a portion of the collateral, and repay the debt, earning a 5% reward for doing so while the protocol keeps another 5% as a penalty. That part isn't unusual. The unusual part kicks in when liquidation can't fully execute, when a market is thin, a crash is violent, or the collateral itself is something illiquid like a real-world asset. Instead of leaving a shortfall as bad debt the protocol has to absorb, TermMax delivers the remaining collateral directly to lenders in kind. Physical delivery, not a forced fire sale into an empty order book.
The upside is real: this is precisely what lets TermMax accept collateral that other lending markets won't touch, low-liquidity tokens, tokenized real-world assets, anything that can't reliably be sold in a two-hour window without moving its own price. Protocol insolvency risk drops sharply because there's no scenario where the system owes more than it can pay.
The trade nobody should gloss over is where that risk actually goes. It doesn't disappear, it moves onto lenders, who signed up expecting a stablecoin return and might instead end up holding a volatile asset they never chose, sometimes with a delay before a vault has enough liquidity to let them exit. TermMax didn't eliminate the risk of a bad market. It relocated it, deliberately, to the party best positioned to hold the asset rather than the protocol itself.
That's a defensible engineering choice, arguably more honest than pretending a forced sale in a dead market would protect anybody. But it only works if lenders understand what they signed up for. A stablecoin lender who never reads past the advertised yield could be surprised the day physical delivery hands them an asset never intended to be held.
When a TermMax loan crosses its liquidation threshold, liquidators get a two-hour window to step in, take a portion of the collateral, and repay the debt, earning a 5% reward for doing so while the protocol keeps another 5% as a penalty. That part isn't unusual. The unusual part kicks in when liquidation can't fully execute, when a market is thin, a crash is violent, or the collateral itself is something illiquid like a real-world asset. Instead of leaving a shortfall as bad debt the protocol has to absorb, TermMax delivers the remaining collateral directly to lenders in kind. Physical delivery, not a forced fire sale into an empty order book.
The upside is real: this is precisely what lets TermMax accept collateral that other lending markets won't touch, low-liquidity tokens, tokenized real-world assets, anything that can't reliably be sold in a two-hour window without moving its own price. Protocol insolvency risk drops sharply because there's no scenario where the system owes more than it can pay.
The trade nobody should gloss over is where that risk actually goes. It doesn't disappear, it moves onto lenders, who signed up expecting a stablecoin return and might instead end up holding a volatile asset they never chose, sometimes with a delay before a vault has enough liquidity to let them exit. TermMax didn't eliminate the risk of a bad market. It relocated it, deliberately, to the party best positioned to hold the asset rather than the protocol itself.
That's a defensible engineering choice, arguably more honest than pretending a forced sale in a dead market would protect anybody. But it only works if lenders understand what they signed up for. A stablecoin lender who never reads past the advertised yield could be surprised the day physical delivery hands them an asset never intended to be held.
