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Term Finance is a noncustodial fixed-rate liquidity protocol modeled on tri-party repo arrangements common in traditional finance (TradFi). Liquidity suppliers and takers are matched through a unique weekly auction process where liquidity takers submit bids and suppliers submit offers to the protocol, which then determines an interest rate that clears the market. Bidders who bid more than the clearing rate receive liquidity and lenders asking less than the clearing rate, supply. All other participants’ bids and offers are said to be “left on the table.”

What is Tri-Party Repo?

Tri-party repo is a financial arrangement where a seller sells an asset at a negotiated price (purchase price) and simultaneously agrees to repurchase that asset at a future date (repurchase date) at a pre-specified price (repurchase price). The difference between the repurchase price and the purchase price (price differential) can be thought of as the interest earned by the buyer over the term of the arrangement. The repurchase price is a function of the pricing rate or repo rate. Economically speaking, the arrangement is identical in substance to a collateralized loan. The third party in the “tri-party” repo arrangement is a collateral agent who is designated by both parties to handle settlement and manage collateral on behalf of both parties.

How Does Term Finance Work?

The Term Finance Protocol is a protocol that governs the deployments of Term Repo arrangements. Term Repo is an on-chain implementation of fixed-rate fixed-term borrowing modeled on traditional tri-party repo with a few key differences: (i) Term Repos involve digital assets rather than fiat and real world assets, (ii) Term Repos utilize noncustodial smart contracts to automate the settlement and collateral management functions typically administered by a collateral agent in the TradFi context, and (iii) the Repo Rate attached to Term Repo Tokens minted to lenders (and paid by borrowers) is determined by auction.
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