Understanding Higher yields on Timeswap

A deep dive into yields in DeFi as well as how Timeswap is able to generate higher yields compared to other protocols

Let’s talk Yields!

Since the launch of Timeswap V1 on Polygon mainnet in March 2022, the industry has witnessed one of the highest volatility events in the history of DeFi. Yet our protocol has functioned exactly as expected without facing any issues whatsoever. All of this sounds cool from a perspective of ‘Safety’. But in DeFi, most of the users care about only one thing: Yield. And that is what we are going to talk about today. We will be looking at where the yields are coming from on Timeswap vs other DeFi protocols and a lot more.

Throughout the year, we witnessed a great deleveraging in the entire industry. The collapse of algorithmic ponzis, overleveraged institutions, and insolvencies. This deleveraging wept the demand for borrowing and source of yields in DeFi at a large magnitude. At the same time, the FED continued to increase rates which set the benchmark for DeFi yields even higher.

(source: https://fred.stlouisfed.org/series/FEDFUNDS)

Yields in DeFi-Where do they come from?

  1. Demand for leverage(from borrowers)

Borrowers pay interest rates in order to get temporary liquidity without losing their exposure to the tokens they hold.

For eg: Borrowing USDC @ 5% APR by locking ETH instead of selling ETH for USDC.

2. Token incentives(Liquidity mining)

Rewards distributed in the form of Governance tokens and other tokens to attract more lenders/borrowers. These rewards are typically temporary and unsustainable in nature.

(image credits: https://twitter.com/shivsakhuja/status/1530712622374342658?s=61&t=cHjj4TdZ772BAlCGEKPeUQ )

For the sake of this article, we will only focus on the yields that come from borrowers.

DeFi money market Designs

DeFi money markets of today have predominantly two designs:

A. Continuous Lending protocols: Lending and borrowing on such protocols happen in a continuous manner. Lenders earn variable interest rates which depend on supply and demand for lending/borrowing on the protocol. Lenders also get the flexibility to withdraw their liquidity anytime.

For eg: Loans on AAVE, Compound, Euler, etc are continuous and don’t have any maturity date.

B. Fixed Term Lending: Here, lending/borrowing is for a fixed duration with fixed interest rates. Generally lenders can withdraw their liquidity only after the term ends.

For eg: Loans on notional finance, Yield protocol etc have a fixed maturity date.

It is also worth looking at the data for interest rates on these protocols. Here’s how the Interest Rates for USDC have looked for the entire year of 2022:

(Source: https://dune.com/PierreYves_Gendron/defi-yield-explorer)

Rates on Continuous protocols hovered between 1–3%, sub 2% for the majority of time.

Rates on Notional finance(Fixed term market) have always dominated the variable rates, but they kept falling to an extent where they were less than the FED rates.

(Source: https://dune.com/PierreYves_Gendron/Notional-V2-Dashboard)

C. Timeswap — Best of both worlds

A generalised AMM works for any token and enables creation of a lending market for any pair of tokens. AMM formula is used to create markets for any token pair. Interest rates and collateral ratio are market driven and don’t depend on token voted governance.

How Timeswap’s design enables higher Yield

  1. Fixed Maturity: Timeswap pools have fixed maturity and fixed term loans always generate higher yields compared to continuous lending.
  2. Non-liquidatable: Loans on Timeswap are non-liquidateable. This provides a case for them to take loans without fear of liquidations. This means borrowers don’t have to maintain collateral ratios. It is also a reason why borrowers pay a higher premium on Timeswap.
  3. Secure long tail lending: Since Timeswap is a generalised AMM, it can be utilized to build markets for long tail assets as well in a secure maner. This enables creation of lending markets for tokens which have low liquidity which can command higher borrow rates.

An example is Ethereum merge trade that many users on Timeswap had undertaken. Timeswap markets are also ideal for event specific strategies. During the Ethereum merge in September 2022, the borrowing activity increased significantly. Users were borrowing USDC to buy ETH and farm airdrops; there was a huge APR spike during that period as seen in the chart below.

Timeswap pools provided double digit yields for the majority of the year.

(source: https://dune.com/pippellia/timeswap-study)

Though we need to consider thin liquidity and low maturity period(1–2 weeks). So, how does one justify double digit interest rates? Well, there are no sustainable high yields without higher risks. With Timeswap, lenders bear additional risk associated with non-liquidateable nature so they would naturally expect higher yields to compensate the risk undertaken.

Risks behind the High yields

1. No Liquidation protection: Timeswap is an AMM and unlike other lending markets, Timeswap does not liquidate its borrowers. Instead, the borrowers’ collateral is distributed to the lenders and LPs in case of defaults.

2. Recoup less principal: The no-liquidation model exposes the lenders to a risk of earning collateral which is less in value compared to the tokens they lent.

While, for a lender it is a risk, borrowers at the same time see it as a reward. No liquidations allow borrowers to take loans and leverage up without fearing volatility. This is what makes them pay higher interest rates. Hence, making Timeswap yields sustainable at larger scales.

Now that we understand the risks and benefits of this model, let’s have a look at the pros and cons(to be addressed in V2).


- Higher yields compared to other markets.

- Oracle-less: No oracle dependency allows us to prevent any manipulation risk which creates wider opportunity for yield generation on long tail assets.

- Earn yields on a wide range of assets: While we talked about stablecoins above, it is to be noted that Timeswap can offer yields on any asset because of its oracleless AMM.


- Get collateral tokens which are lesser in value compared to tokens you lent.

- Capital is locked for the entire duration of the pool. A lender(and LP) can withdraw tokens only after the pool matures.

- Capital repaid by borrowers is not reused.

- Undercollateralization. A large supply of tokens can create temporary undercllateralisation in the pool.

In order to address the cons associated with V1, we built an improvised version of our AMM, Timeswap V2.

Improvements in Timeswap V2:

- 4–5x capital efficiency

- Anytime entry/exit for lenders(and LPs)

- Utilisation of repaid capital

- Always overcollateralisation.

Read more about Timeswap V2 here.


Timeswap’s current hybrid model of fixed term and non-liquidatable loans have consistently generated higher yields organically. Since the pools till date had lower duration, the yields reflected the demand for leverage and hedging in the market. Going forward we plan to launch pools with larger duration as well.

We believe Timeswap V2 is a significantly improved over V1 and can give more competitive yields, cater to a larger market at 4–5x more capital-efficiency.

Time Is Money⏳

Follow us:

Discord: https://discord.gg/timeswap
Twitter: https://twitter.com/TimeswapLabs
Medium: https://medium.com/Timeswap
Telegram: https://t.me/Timeswap



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