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At a high level, the algorithm implemented by our smart contracts determine a clearing rate by iterating through sorted bids and offers received in auction to find the rate where supply meets demand and the total volume of loans matched between lenders and borrowers is maximized. You can review the logic behind this algorithm in the internal function _calculateClearingPrice in the TermAuction.sol contract.
The interest rate submitted in auction determines whether your tender filled in auction. Offers at or below the market clearing rate and bids at or above the market clearing rate are eligible for assignment. All other bids and offers outside of this range are said to be "left on the table", and associated tokens are returned to the owners’ wallets. Assignments prioritize the cheapest suppliers on the lending side (i.e., those with the lowest interest rates) and the borrowers most willing to pay (I.e., those with the highest interest rates). For more precise details view our documentation on the assignment process.
To ensure that auctions clear and settle as expected and to prevent "spoofing", auction participants are required to lock their collateral into non-custodial smart contracts at the time of bid/offer submission. Lenders lock the amount they have tendered to lend out and borrowers lock the collateral tokens backing the they are seeking to borrow. Participants may cancel or edit their tenders at any time to have their tokens returned or adjusted.
To the extent that you submit multiple bids (or offers) into a single auction and more than one of them are accepted, all accepted bids (or offers) are aggregated into a single position at the market clearing rate. Tokens locked belonging to bids (or offers) not accepted in auction are automatically returned to your wallet.
Generally speaking, lenders are not subject to any protocol fees. Borrowers are subject to two fees: (i) a servicing fee that is quoted on an annualized basis and is applied to the amount borrowed and (ii) liquidated damages to the extent their position is liquidated due to a decline in collateral value below the maintenance margin requirements or failure to repay upon maturity within the repayment window.
Borrowers are required to ensure that the market value of collateral posted against a loan meets or exceeds the required maintenance margin ratio. If your collateral value falls below the requirement, your collateral will be subject to liquidation. Our smart contracts are designed to mitigate losses from liquidation by limiting the amount of debt that can be covered by a liquidator to the minimum amount necessary to return your collateralization ratio back to the initial margin ratio plus some minor buffer. To the extent the value of your collateral increases, you will be able to withdraw any excess collateral over and above the maintenance margin ratio.
No, with some caveats. Term Repo loans are non-callable loans. Borrowers commit to borrowing and lenders commit to lending through the full term to maturity. This prevents "bank-run" dynamics where lenders try to pull before borrowers are ready to repay and leads to a more stable and sustainable market.
Lenders are, however, free to find buyers of their Term Repo Tokens if they need liquidity prior to the maturity date. Borrowers, similarly, can negotiate with Term Repo Token holders (lenders) to buy back their loan. To the extent borrowers are able to "buy back" Term Repo Tokens they are able to burn them against their debt to collapse their position prior to the maturity date.
Rollovers allow borrowers to leverage collateral posted against an existing loan against a new Term Repo without having to repay, withdraw, and redeposit. Rollovers, however, are not guaranteed to fill:
- Rollover bids will be rejected if the rollover bid rate specified by the borrower is less than the clearing rate of the rollover auction.
- If the rate tendered meets the market clearing rate in the rollover auction, it is possible that the bid will only receive a partial fill. In this case, only a portion of the amount elected to be extended will be filled and the remainder needs to be repaid prior to the expiration of the repurchase window.
- Users are also responsible for ensuring that the collateral being rolled over is sufficient to cover the maintenance margin ratio required by the terms of the new Term Repo loan being rolled into. If collateral rolled is insufficient to cover the maintenance requirement, the rollover may fail.
- Lastly, in some rare cases, it is possible that the rollover auction will not complete in a timely fashion such that the new auction fails to clear before the repurchase window of the old Term Repo loan expires.
Loans must be repaid upon maturity within the repurchase window, which is typically a twenty-four hour window from the maturity date. Failure to do so within the repurchase window means that your collateral will be eligible for liquidation and subject to applicable liquidated damages. Be sure to monitor your positions carefully for upcoming maturities and repay/rollover your position as necessary to avoid liquidation.
Term Labs is developed by a team with deep TradFi, Big Tech and DeFi experience: