Term Finance Explained: A Fixed-Rate, Fixed-Term Non-Redeemable On-Chain Lending Protocol

Introduction

Term Finance has processed $132 million** in tenders since its mainnet launch, including **$58.96 million in deposits and $73.29 million** in loan requests. Its unique cyclical auction model has successfully matched **$46 million in loans, with recent auctions averaging $500,000** per transaction. Backed by a **$2.5 million funding round led by Electric Capital (with participation from Circle Ventures and Coinbase Ventures), Term Finance merges traditional finance's tri-party repo model with DeFi innovation to offer fixed-rate, fixed-term lending.

Key Features of Term Finance

1. Fixed Interest Rates

   • Provides borrowers and lenders protection against market volatility.
   • Example: 4-week USDC loans at 3.495% vs. Aave/Compound’s average 5.72%.

2. Fixed-Term Loans

   • Loan periods: 1, 2, or 4 weeks (no early redemptions).
   • Borrowers must repay during the 12–24-hour repo window after maturity.

3. Non-Redeemable Assets

   • Lenders cannot withdraw funds prematurely, ensuring capital stability.

4. Overcollateralization

   • Supported assets: USDC, USDT, sDAI, WETH, wstETH.
   • Initial collateral ratio: 150%; liquidation threshold: 125%.

How Term Finance Works: The Tri-Party Repo Model

Traditional Finance (TradFi) Basis

In a tri-party repo, three entities collaborate:

• Lender: Provides short-term liquidity.
• Borrower: Pledges collateral (e.g., bonds).
• Third-Party Agent: Manages collateral and settlements.

DeFi Adaptation

Term Finance replaces the third party with smart contracts:

• Term Auction: Sealed bids/offers determine a clearing rate (market-balancing interest rate).
• Term Repo Tokens: Issued to lenders as proof of repayment (principal + interest).
• Collateral Management: Locked in Term Repo Locker smart contracts, visible to all parties.

👉 Learn how smart contracts enhance transparency

Advantages Over Traditional DeFi Protocols

| Feature | Term Finance | Aave/Compound |
|------------------|----------------------------|----------------------------|
| Interest Rate| Fixed | Floating |
| Term | 1–4 weeks | Open-ended |
| Redemption | Non-redeemable until maturity | Anytime |

Tradeoffs:
✅ Predictable rates but ❌ no exposure to market upside.

Liquidation Mechanics

1. Mid-Term Liquidation: Triggered if collateral falls below 125%.

   • Example: A $1.5 wstETH collateral drops to $1.2 (below 125%). A liquidator repays the $1 USDC debt, receives $1.2 wstETH, and pays a 2.8% penalty fee ($0.028) to the protocol.
2. Default Liquidation: Occurs if repayment fails during the repo window.

FAQs

1. Why choose fixed-rate loans?

Fixed rates shield users from volatility, ideal for stablecoin borrowers or conservative lenders.

2. Can I withdraw excess collateral?

Yes! Borrowers can withdraw collateral above the 150% ratio or add more to avoid liquidation.

3. How does Term Finance profit?

Protocol charges a 0.3–0.5% annual fee on matched loans.

👉 Explore DeFi lending strategies

Conclusion

Term Finance bridges TradFi reliability with DeFi efficiency, offering structured, transparent lending—though at the cost of flexibility. Its auction model and fixed terms cater to users seeking predictability in crypto’s turbulent markets.