In the rapidly evolving landscape of decentralized finance (DeFi), Term Finance has emerged as a pioneering protocol introducing a novel approach to on-chain lending. By combining principles from traditional finance (TradFi) with blockchain-native innovation, Term Finance offers fixed interest rates, fixed loan terms, and non-redeemable borrowing instruments — features largely absent in mainstream DeFi platforms like Aave or Compound.
Since its mainnet launch over six months ago, Term Finance has processed $132 million in tenders**, including $58.96 million in deposits and $73.29 million in loan requests. Through its unique **circular auction model**, the protocol successfully matched **$46 million in loans, with recent auctions averaging nearly $500,000 per cycle — a clear sign of growing market confidence and liquidity depth.
Backed by a $2.5 million seed round led by Electric Capital in February 2023 — with participation from Circle Ventures and Coinbase Ventures — and audited by Sigma Prime in May 2023, Term Finance is rapidly establishing itself as a credible player in the fixed-rate DeFi sector.
👉 Discover how fixed-rate lending is reshaping DeFi’s financial infrastructure.
The Tri-Party Repo Model: Bridging TradFi and DeFi
At its core, Term Finance is built on the tri-party repo (repurchase agreement) model, a well-established mechanism in traditional finance used for short-term funding and liquidity management.
In a classic tri-party repo:
- The borrower sells securities (e.g., government bonds) to the lender with an agreement to repurchase them later at a higher price.
- A third-party agent (often a custodian bank) manages collateral, settlement, and risk monitoring.
This structure ensures transparency, reduces counterparty risk, and streamlines operations — all qualities that align perfectly with DeFi’s goals.
On-chain, Term Finance replaces the custodial third party with smart contracts. The protocol acts as the automated intermediary, locking collateral in a secure vault (the Term Repo Locker) and enabling real-time verification by both parties. It also monitors collateral health and triggers liquidations when necessary — effectively decentralizing the role of the traditional agent.
How Term Auctions Work: A Sealed-Bid Matching Engine
Term Finance uses a mechanism called Term Auction, a sealed-bid, reverse double auction system designed to match borrowers and lenders efficiently.
Here’s how it works:
- Borrowers submit sealed bids specifying the amount they want to borrow and the maximum interest rate they’re willing to pay.
- Lenders submit sealed offers indicating how much they’re willing to lend and the minimum rate they’ll accept.
- The protocol calculates the clearing rate — the interest rate that balances supply and demand.
- All successful bids (borrowers offering rates ≥ clearing rate) and offers (lenders accepting ≤ clearing rate) are matched at this single rate.
This creates a single-price, two-sided auction — similar to a call market — which enhances liquidity and minimizes price slippage. Importantly, unmatched participants are simply left out, maintaining market efficiency.
Once matched:
- Borrowers receive funds and pay a small annualized service fee (0.3%–0.5%).
- Lenders receive Term Repos Tokens — ERC-20 tokens representing their claim on principal plus interest upon maturity.
These tokens are non-transferable and cannot be redeemed early — reinforcing the fixed-term nature of the loan.
👉 Learn how you can participate in next-gen DeFi auctions with predictable returns.
Fixed Rates vs. Floating Rates: Why It Matters
Unlike Aave or Compound, where interest rates fluctuate based on utilization, Term Finance offers fixed rates for the entire loan duration — typically 1 week, 2 weeks, or 4 weeks.
Arthur Hayes, co-founder of BitMEX, highlighted this advantage in September 2023:
- Term Finance’s 4-week USDC loan rate: 3.495%
- Aave V2/V3 & Compound average: 5.72%
Similarly, for ETH-backed loans:
- Term Finance: 2.395%
- Competitors: 3.19%
This demonstrates Term Finance’s ability to offer more competitive rates — likely due to its auction-based pricing and reduced volatility exposure.
Benefits of Fixed-Term, Non-Redeemable Loans
| Feature | Benefit |
|---|---|
| Fixed Interest Rate | Predictable borrowing costs; hedges against rate spikes |
| Fixed Term | Enables precise capital planning for both lenders and borrowers |
| No Early Redemption | Ensures yield certainty for lenders; discourages short-term speculation |
However, trade-offs exist:
- Lenders sacrifice flexibility — no early withdrawal.
- Borrowers cannot refinance early even if market rates drop.
- Capital efficiency may be lower compared to revolving credit lines.
Yet, for institutions, DAO treasuries, or risk-averse investors, these constraints provide stability — a rare commodity in volatile crypto markets.
Collateral Management and Liquidation Mechanics
Term Finance employs an overcollateralized lending model, supporting major assets including:
- USDC
- USDT
- sDAI
- WETH
- wstETH
Each auction specifies:
- Initial collateral ratio (e.g., 150%)
- Minimum maintenance ratio (e.g., 125%)
If the collateral value drops below the threshold, liquidation is triggered.
Example: Liquidation in Action
Consider the 4W-USDC(wstETH)-Mar 29 auction:
- User A borrows $1 USDC by depositing $1.5 worth of wstETH (150% collateralization).
- ETH price falls; wstETH value drops to $1.2 — now below the 125% floor.
- A liquidator repays the $1 debt.
- In return, they receive the $1.2 wstETH collateral.
- However, they must pay a penalty fee (e.g., 2.8%) — $0.028 — to the protocol as default compensation.
Net profit for liquidator:
$1.2 (collateral) – $1 (debt repaid) – $0.028 (fee) = **$0.172**
This mechanism incentivizes prompt liquidations while funding protocol safety.
Additionally:
- Borrowers can withdraw excess collateral above the initial ratio.
- They can also top up collateral to avoid liquidation.
- Loan rollover is allowed before maturity, offering some flexibility.
FAQ: Common Questions About Term Finance
Q: What makes Term Finance different from Aave or Compound?
A: Unlike those platforms’ variable rates and instant withdrawals, Term Finance offers fixed-rate, fixed-term loans with no early redemption. This brings predictability to both borrowing costs and lending yields.
Q: Can I sell my Term Repos Token?
A: No. These tokens are non-transferable and must be held until maturity, when they’re burned to redeem principal + interest.
Q: How often are auctions held?
A: Auctions are scheduled regularly for each asset pair and term. Frequency depends on demand but typically occurs weekly or biweekly.
Q: Is my collateral safe?
A: Yes. All assets are held in audited smart contracts (Term Repo Locker), with real-time monitoring and automated liquidation safeguards.
Q: What happens if I miss repayment?
A: Failure to repay within the 12–24 hour redemption window results in default liquidation. The collateral is sold off to repay lenders, and a penalty is charged to the protocol.
Q: Why use auctions instead of continuous markets?
A: Auctions allow for efficient price discovery, reduce front-running risks, and enable large-volume matching in a single batch — ideal for institutional-grade DeFi activity.
👉 Explore how auction-based lending can offer better rates and stability than traditional pools.
Final Thoughts: The Future of Structured On-Chain Debt
Term Finance represents a significant step toward maturing DeFi’s financial primitives. By integrating time-tested models like tri-party repos with blockchain automation, it introduces structured debt instruments that cater to sophisticated users seeking predictability in an otherwise chaotic ecosystem.
While not suited for every user — especially those needing flexible access to funds — it fills a critical gap in DeFi’s yield landscape. As institutional adoption grows and demand for stable-return products increases, protocols like Term Finance could become foundational layers in the next generation of on-chain finance.
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Term Finance, fixed interest rate, on-chain lending, DeFi protocol, term auction, repurchase agreement, overcollateralized loan, smart contract