DeFi Migration: All roads lead to Timeswap
The Odyssey is a tale of a man seeking to find home. When we look at the state of DeFi, we see the same tale of users trying to find a safe home for their assets. So, what is home? A safe, stable environment for the passive income earnoooors out there. And no home is safer than one where you don’t wake up to see your positions liquidated, your dreams shattered into pieces smaller than a wei. What we will recount is the inevitable migration of capital from casino to casa: a case for simpler solutions, like the fixed term loans Timeswap offers. Read on to see where Odysseus ends up!
First came the Frenzy
The Trojan War started this tale.
DeFi summer catapulted the launch of yield strategies that people dove into headfirst because everything only went Up Only. New pair listed on Uniswap? Press the green button and make money. Food farm opening up near you? Be the first in line and make money. In this ultrabubble, there was no need to think about a sustainable economic model because new liquidity was flowing in at an unprecedented scale. Alas, this could not last.
From rebase tokens to outright ponzis, everything eventually found its equilibrium. Looking at the TVL charts now, you can see that the ones who survived thought about viable economic models from the start. These protocols had legitimate use cases that could support their own foundations. Lido is part of securing Ethereum, Maker has propagated a decentralised stablecoin, Aave is a money market and both Curve & Uniswap are exchanges. But, there seems to be one thing missing from this equation: a protocol that offers fixed term finance to the DeFi degens.
Some of the clue of why this is the case is possible to glean from the term degen itself. Degens are not really looking for risk free rates, they want to gamble for that 100x, so there really wasn’t much of a market for a boring instrument like a fixed term loan. However, even degens need to park their capital somewhere to leverage for profits. And, this is reflected in the amount of structured products and fixed term instruments mushrooming in DeFi.
Take Aave for example, it has one of the deepest liquidity of any money market out there. But even it suffers from volatile rate spreads and unexpected liquidations when the market takes a dive as you can clearly see in the below image for the interest rate in borrowing USDT. This can make long term planning difficult, which has knock-on effects on what kinds of economic activity are viable in DeFi. Recently, Alameda liquidators got themselves liquidated on Aave, which seems like a funny story but we need to remember: if we are going to onboard the next billion users, we have to build to avoid mistakes like these.
Second came the Structure
Ogygia is a familiar comfort, but it will never be home.
Structured products or vaults, are strategies where users deposit capital in return for a semi-stable yield with no great chance of loss. This has become an especially popular implementation on top of options/perpetuals protocols. Dopex, Rage Trade, GMX are all examples of this and they are incredibly popular. In fact, Rage Trade hit their vault cap in minutes! Looking at that line, it’s hard to believe that this is a bear market.
GMX has been a catalyst in all this. This trading platform pays out fees to people who supply liquidity and stake their tokens. This has led to a wide variety of protocols building on top of it to maximise yield. Rage Trade is one of them, its Delta Neutral vaults run through GMX to capture yield.
Another branch of protocols instead tries to actively manage Uniswap liquidity to capture the maximum amount of fees on Uniswap V3. Because of the complicated nature of Uniswap V3, users would rather allow a protocol to automatically manage their positions for optimal returns instead of constantly checking the profitability of their range decisions. Arrakis Finance led the way in this, capturing over $1.8 billion in Uniswap liquidity at its peak and even deep in the bear market sitting on a pile of cash almost half a billion dollars strong.
Third came Temptation
Our degens land on Aenea, unaware of the wily Circe
Now we move on to protocols that offer fixed-term instruments for users. The first one we will be looking at is Yield Protocol, offering loans for a fixed-term. It has managed to garner almost $8 million in TVL at the present, down from its ATH of around $38 million, a multiple of around 4.75.
The second one we look at is Pendle, which operates on separating the yield from the base token and allows users to deposit in fixed-term pools for yield. Pendle is currently sitting on a TVL of around $21 million, down by a multiple of 1.8 from its ATH of around $38 million.
For a comparison, let’s look at how Aave performed over the same time period. It had an ATH of over $31 billion in TVL, down to around $5.6 billion now. That’s a multiple of around 5.54 from market highs.
The overall TVL of DeFi itself is down from a high of $217 billion to $64 billion today. That is a multiple of 3.39 from ATH. An interesting fact is that networks themselves now offer a risk-free rate through staking which now accounts for a significant portion of the TVL, to the point where Lido Dominance is being displayed on Defillama.
This shows that fixed-term instruments have kept pace with the market dynamics itself and not lost any proportional ground. If you are wondering why the multiples are there, it is to show they have even outperformed one of the premier continuous money markets in terms of sticky liquidity.
Another one that has to be mentioned is Notional, which launched leveraged vaults recently. This strategy has proved quite successful and the vault has garnered 1700 ETH in deposits in just a few months! Fixed term instruments are the foundation upon which interesting strategies like this depend and we are going to see more such innovations in the future with so many protocols finally realising the potential in the space.
We can also see the cautious growth of protocols who have spotted the same opportunities in the market of fixed term lending. Ajna and Myso are new entrants who are going to offer fixed term loans to users, displaying both builder and investor interest in this space. Even Aave has tried to offer a fixed rate of interest, if not a fixed term.
So, what do we learn from this? Users want something approaching a risk free rate that is simple to use, doesn’t need to be actively managed and won’t lead to accidental capital loss in the form of liquidations. Protocols which offer this have weathered the DeFi drawdown better than a lot of others and have even done better than some premier protocols in the space. Both builders and investors see a future to this market because new protocols offering these instruments are coming up more rapidly than before.
Finally the Future…
Ithaca beckons and Penelope awaits. Odysseus has finally found his way home.
Timeswap offers an optimal compromise between the users’ needs and wants. Non-liquidatable loans, fixed term debt and market determined interest rates and collateral limits combine to form a protocol more potent than Poseidon’s rage. Timeswap V1 started in March of last year and has seen millions in loan volume and liquidity added.
Our thesis has only been strengthened not only by the capital involved but also by the activity and number of users Timeswap has reached. With over 45,000 transactions from more than 6000 unique users, our conviction in the vision of a DeFi landscape dominated by fixed term instruments is growing. After all, fixed income capital markets in TradFi are worth more than $120 TRILLION for a reason. They underlie the riskier bets other forms of capital can take, by shoring up the system.
Timeswap will build this base layer of liquidity and capital will inevitably migrate to fixed term instruments for the same reason it does in TradFi. It allows relatively safer leverage to invest excess capital into high growth markets like your favourite dogcoins, it is simpler to have determined liabilities instead of constantly having to reevaluate your positions and it can offer a stable environment for long term bets to play off.
Timeswap V2 will bring this vision closer to reality with fine-tuned risk management and better capital efficiency. For the user, nothing changes except a more streamlined UI and better discovery of asset parameters like CDP and interest rates. It will be as seamless as before with the flow of depositing collateral, borrowing the asset and possibly setting a reminder for the maturity!