Timeswap — New Paradigm of Lending Protocol
Revolutionizing On-Chain Lending with Innovative Protocol Design and Promising Growth Momentum
BD WeChat:MiaoFrank1229
Produce:@BuidlerDAO
Authors:@0xLukeCrypto @Janezh1111
Editing:@createpjf
The article only represents personal views and does not constitute any investment advice
✨ TLDR:
Lending is a major track with strong demand, no less significant than trading. However, the development of on-chain lending protocols lags far behind trading protocols. In contrast to the prosperity of trading protocols on-chain, most lending protocols currently only support a few mainstream assets, making them less competitive than centralized exchanges.
The rise of on-chain protocols relies on two forces — robust user demand and the explosion of new asset categories. These two factors have fostered the prosperity of on-chain protocols, creating unique barriers compared to CEX. We tend to believe that lending protocols are not lacking in user demand or new asset supply, but they currently lack a crucial catalyst — appropriate protocol design paradigms.
The essence of lending is the transfer of time value, and pricing interest rates is essentially pricing the time value. Traditional lending protocols use a “oracle + governance parameters” pricing model, which has clear limitations. However, Timeswap (https://timeswap.io/) takes a different approach by separating the time value from spot tokens, utilizing AMM to price the time value. It offers a novel and elegant lending solution. By breaking away from oracles, Timeswap can support any asset without permission, breaking the bottleneck of previous lending protocols and creating a competitive experience for both lenders and borrowers.
The design of the Timeswap protocol is innovative and aligns with market development trends, and we believe it has the potential to carve out a place in the multi-billion lending protocol space. Currently in its early stages with a TVL just over $10 million, Timeswap has been gradually taking operational actions, such as entering the LRT field, showing promising growth momentum. The protocol is currently using $TIME for liquidity incentives and plans to officially launch $TIME in Q1. With a previous valuation of $40 million FDV, considering its potential, we find $TIME to be an attractive asset at this valuation and worthy of attention📈
Table of Contents
Achilles' Heel of Lending Protocol: Oracles and Governance
Timeswap's Unique Approach — Separation and Pricing of Time Value
Lender Sells Time Value
Borrower Purchases Time Value
Conclusion
Looking Through Different Roles' Angles
As Lender
As Borrower
As Liquidity Provider
Positive Tailwind: Will Timeswap Ascend to New Heights?
Timeswap is at the Inflection Point of Growth
Valuation Levels of Mainstream Lending Protocols
Seeking the Promised Land: Timeswap's Journey to Value Enhancement
Our Investment Judgment
Summary of Perspective
Yield Strategy
Achilles’ Heel of Lending Protocol: Oracles and Governance
In the world of DeFi, lending protocols may be the least “DeFi” in nature. The long-term vision for DeFi protocols is to be permissionless, no-governance, and immutable. However, lending/borrowing protocols, due to their business characteristics, heavily rely on governance and off-chain data (Oracles).
The prevailing lending model in DeFi is over-collateralization, where users must provide excess assets as collateral to borrow. For instance, collateralizing $100,000 in WBTC to secure a $50,000 USDC loan. This approach is currently the only feasible lending model in the DeFi world due to the absence of identity and legal frameworks in the crypto space. Borrowers are incentivized to repay solely because their collateral surpasses the borrowed amount. Unlike TradFi, there is no concept of credit loans in this context.
A rise in user debt interest or a decline in WBTC price relative to USDC can result in user insolvency. In such cases, borrowers may default, prompting the need for proactive position liquidation. For instance, initiating liquidation when WBTC hits $80,000. A third-party liquidator seizes $80,000 worth of collateral, settling the $50,000 loan on behalf of the borrower. The critical factor here is setting an effective liquidation threshold to ensure adequate incentives for liquidators, preventing potential bad debt scenarios during rapid price declines or low market liquidity.
In the described scenario, we can observe that lending products require knowledge of prices and market liquidity to initiate liquidations. And an asset might: 1) have trading pairs on multiple chains and various DEX/CEX platforms; 2) its price and market liquidity may not be easily obtained. For these two off-chain pieces of information, the former requires oracles to provide pricing, while the latter relies on governance — manually setting parameters such as LTV/Borrow Cap.
Clearly, the current paradigm of lending protocols includes many off-chain and manual intervention elements, reducing its trustlessness. This design is not only imperfect but also increases risk and limits scalability. Relying on oracles introduces additional trust, with concerns like quoting errors, delays, and accuracy issues. According to a report by Messari as of February 2021, 38% of capital losses due to hacking events were attributed to oracle pricing issues, while the 34% share of flash loan attacks may also have some association with price manipulation:
The manually set governance parameters naturally cannot guarantee perpetual adaptability to various market emergencies. Moreover, both approaches are not scalable and struggle to accommodate new asset types, such as LP Tokens or long-tail assets.
The limitations of the old lending paradigm are evident; lending protocols with traditional designs only cater to a few mainstream assets with conservative parameters. In contrast to centralized exchanges supporting dozens of assets, on-chain platforms like Aave and Compound are limited to mainstream assets. The disparity between decentralized and centralized lending markets is more significant than that between DEX and CEX.
Additionally, the primary competition among lending protocols centers on asset support. New protocols often differentiate themselves by adopting more aggressive approaches to listing assets, but this can lead to additional risks. Even Aave, slightly more aggressive than Compound, experienced bad debt due to supporting CRV, facing repercussions during each CRV-related event. Many other more aggressive lending protocols have suffered severe attacks, with some shutting down:
Venus, after multiple attacks, has long been in a state of insolvency:
https://twitter.com/WazzCrypto/status/1623078934836310017
Mango suffered an oracle manipulation attack, resulting in losses exceeding 100 million:
https://twitter.com/mangomarkets/status/1579979342423396352
Rari faced an oracle price manipulation attack, and the protocol is now closed:
https://twitter.com/RariCapital/status/1455569653820973057
… (There are indeed too many such cases)
On-chain lending protocols have encountered bottlenecks, but new assets are continually emerging. Notably, among Uniswap’s top 20 tokens by volume, approximately 30–50% are not listed on Binance, and over half lack support from Aave/Compound. Besides the long tail assets, emerging asset types are also a unique feature of the on-chain world compared to CEX. For example, LP Tokens such as GMX’s GLP and GM, with a TVL exceeding 500 million, indicate evident lending scenarios. However, the lending demands for these two types of assets are challenging to be met by CEX/existing lending protocols.
Timeswap’s Unique Approach — Separation and Pricing of Time Value
Several lending protocols, including Euler, Silo, and various isolated pool protocols, have explored the long-tail asset space. However, they haven’t deviated from the classical lending protocol paradigm but rather refined it. While Teller/Blend eliminates the reliance on oracles, it requires both lenders and borrowers to manually set interest rates, conducting peer-to-peer matching on-chain. This approach comes with higher entry barriers and lower efficiency, especially noticeable in low-performance blockchain environments.
Timeswap is a protocol we recently discovered that stands out. They eliminate reliance on oracles/governance parameters by abolishing the liquidation process. Unlike Teller/Blend, Timeswap utilizes AMM to address the allocation of responsibilities between Lender/Borrower and the pricing of interest rates/risk, making it more suitable for on-chain low-performance execution environments.
Lending is in essence an exchange of time value, where the lender is willing to sacrifice liquidity, selling the capital’s liquidity value to the borrower during a specific period. Timeswap’s protocol design aligns with this concept, and presumably, this is also the origin of the Timeswap name ⏳.
There are different lending pools in Timeswap, and the pool creator specifies token pairs (A/B), maturity dates, and transition prices (TP) when setting up the pool, as illustrated in the diagram below. Pools are created with various maturity dates and TP
In Timswap’s design, there is no forced liquidation, and it introduces the unique concept of Transition Price (TP). TP is the critical price at which Borrower behavior switches. Taking the example of the USDC/ETH trading pair, where a Borrower collateralizes ETH to borrow USDC, one can anticipate that when the ETH price is high, the Borrower repays to retrieve ETH. Conversely, when the ETH price is low, the Borrower may choose to default, holding onto USDC, and the collateral is handed over to the Lender. Hence, the Lender bears the loss without the need for liquidators. In this process, the Lender is akin to selling a Put option, with fixed interest income equivalent to the option premium.
We can observe that the Lender’s Payoff curve aligns with that of an option:
Lender Sells Time Value
To delve into the intricacies of Timeswap’s protocol design, let’s start from the Lender’s perspective. Let’s say Bob is the Lender, ready to lend out K USDC for a duration of 1 month. In this scenario, Bob invests K USDC and receives two types of tokens in return:
One token, symbolized as “Short” in the diagram, can be seen as a ‘promissory note.’ Through this note, Bob can retrieve the principal of K USDC after 1 month, but he won’t have access to the funds during that month.
The other token, represented as “Long USDC” in the diagram, signifies the Time Value of K USDC which can be tradable by Bob for one month.
In Timeswap protocol, the contract managing the time value separation process is called Time Option. This process can be reversed before maturity. After maturity, Shorts can be redeemed for the principal, and Long USDC loses value.
Comparatively, the pricing logic for Short is clearer than Long. Therefore, Timeswap uses Short for pricing Long. Using the Time Option contract as a foundation, Timeswap developed the Timeswap AMM for the interchange between the two derivative tokens (Long and Short).
Through the AMM, Lenders can convert Long USDC to Short. After maturity, these additional Shorts can be redeemed for spot, representing Lender’s earned interest.
The specific AMM formula is as follows:
x represents the quantity of Long USDC tokens in the pool, and y represents the quantity of Long ETH tokens. However, due to arbitrageurs taking the asset with a higher external price, at any moment, the pool will have either Long USDC (y = 0) or Long ETH (x = 0). Timeswap describes this as symmetry. Therefore, the effective formula for Timeswap is:
z represents the interest per second, and k is the constant product. Interest is paid with Short, so when a Lender deposits Δx/Δy for a Swap, exchanging Δz, they can withdraw Δz*d Short based on the remaining time d.
The reason why the AMM formula uses the variable z, indirectly enabling the exchange between Long and Short, is because lending protocols exhibit the following two characteristics:
The loan interest rate is inversely proportional to the utilization rate of the borrowable amount. That is, the higher the utilization, the higher the interest rate.
At the same interest rate, the longer the loan duration, the higher the cumulative interest, meaning it is positively correlated with the borrowing duration.
These characteristics describe the interest rate, not the interest itself. Therefore, the formula needs to separate the time component from interest. Short represents the total interest, and by removing the time component, we get the interest per second, z. The interest rate formula is:
According to the previous logic, Long USDC is positively correlated with deposited USDC. Therefore, when the Lender deposits more USDC, x increases, and z decreases, meaning the interest rate decreases. Conversely, the same logic applies in reverse. In our assessment, Timeswap has devised an effective AMM formula, as the pattern of variable changes aligns with the operational principles of lending protocols.
So, the complete lending process for the Lender is as follows:
By using the Time Option contract to separate the time value into Long USDC and then swapping it for Short through the AMM, the Lender sacrifices time value to earn interest. Since the interest is only withdrawable after maturity and the total amount is fixed at the time of the swap, the effect for the Lender is akin to a fixed interest rate.
Borrower Purchases Time Value
Lenders sell time value, and Borrowers, on the other hand, engage in the reverse operation by purchasing time value. To achieve this, Timeswap introduces another setting: Transition Price (TP).
In the Timeswap protocol, the exchange rate between collateral and the borrowed asset is always TP. Assuming 1 ETH = K USDC, i.e., TP = K, depositing 1 ETH or K USDC into the Time Option contract will yield a Short and its corresponding Long:
When Lender deposits USDC, it represents lending funds, and when Borrower deposits ETH, it represents collateralizing assets. When the spot price is higher than TP, it is over-collateralized; when the spot price is lower than TP, the pool functions reverse, demonstrating the symmetry of the Timeswap protocol.
Since Short = K USDC — K Long USDC = ETH — Long ETH, we can deduce that ETH + K Long USDC = K USDC + Long ETH. Thus, the relationship shown in the figure below exists:
When users deposit ETH, they can convert Long USD into Long ETH and retrieve USDC.
Then, the Borrower’s borrowing process can operate normally:
Borrower depositing ETH can be considered as the process of depositing collateral. (Red area in the diagram [1])
Borrower obtaining Long USDC through the Swap and exchanging it for real USDC can be seen as the process of borrowing USDC. The exchange rate at this moment determines the interest rate. Thus, for the Borrower, Timeswap operates as a fixed-rate protocol. (Yellow area in the diagram [2])
The remaining Long ETH can be regarded as collateral certificates. (Green area in the diagram [3])
When the user repays, the process needs to be reversed:
Using USDC + Long ETH to obtain collateral ETH + Long USDC.
Long USDC can be partially exchanged for Short, and then combining Long + Short into USDC through the spot manner, partially offsetting the USDC required for repayment in the previous step.
Up till now, we have presented a detailed explanation of the Borrower’s process of acquiring time value (borrowing).
Conclusion
Overall, the design of Timeswap is quite ingenious. The Time Option contract separates the time value and principal of spot tokens, similar to how Pendle separates the current yield of interest-bearing assets and principal. This separation makes the trading and utilization of this value more natural. In comparison, some fixed-rate protocols force tokens to be locked, creating a spread with the spot market to achieve fixed rates, which is actually a form of waste of time value.
The AMM design of Timeswap is characterized by its simplicity and fluidity, reminiscent of our initial impression of the Uniswap formula. Through clever innovations, it aligns the logic of variable changes in the formula elegantly with the business logic of user scenarios, presenting an elegant and classical approach to AMM design.
Looking Through Different Roles’ Angles
As Lender
When lender deposit funds:
If, at the maturity date, the collateral’s price is higher than TP, the lender can retrieve the principal and gain a fixed interest return:Δz*d.
If, at the maturity date, the collateral’s price is lower than TP, the borrower lacks incentive to repay. In such a scenario, the lender acquires collateral worth ‘principal + Δz*d’ at the TP price within the pool. As the market price of the collateral at this point is lower than TP, this results in a loss. Therefore, when lending funds, the lender needs to have a certain level of foresight into future prices.
Using the above chart as an example, essentially, the lender is selling an ETH Put option with a strike price of TP, while the fixed income represents the option premium. This design is similar to the popular structured financial products like ‘Dual Investment’ in CEX. It caters to a common mindset among crypto users: having a price judgment, being willing to ‘buy the dip’ or ‘sell at the peak,’ and not excessively timing the market. In addition to purchasing ‘Dual Investment’, many users also have the habit of selling naked puts or covered calls.
In addition, Timeswap introduces some flexibility where lenders don’t have to wait until the maturity date to exit; they can also withdraw funds in advance. Borrowing is equivalent to selling a Put, while withdrawing assets is akin to buying a Put or re-lending funds at the current interest rate. Therefore, withdrawing assets early is comparable to trading options or engaging in an interest rate swap, with the inherent risk of potential loss of principal.
Therefore, lenders are best off borrowing money when interest rates are high and withdrawing when rates are low. For lenders who lack the ability to predict interest rate changes, it is best to hold onto the debt until the maturity date. After maturity, they will receive the principal along with the fixed income.
As Borrower
When the borrower borrows, they will deposit the collateral required for “principal + accrued interest” into the protocol in one go, meaning they need to prepay all interest at once. The borrower is required to repay before the maturity date. If repayment is not made, the collateral will be handed over to the lender to offset the principal and interest of the loan.
The capital efficiency depends on the setting of TP. Taking ARB and USDC as an example, assuming the current price of ARB is 2 and TP is 1, then each ARB as collateral can borrow 1 USDC, with an LTV of 50%. The closer TP is to the market price, the higher the LTV and the capital efficiency. However, at this point, the lender bears a higher risk, and generally, the interest rate will also be higher.
In traditional lending protocol designs that involve liquidation, borrowers need to actively manage their loan positions and monitor the health of their loan positions. Additionally, interest rates typically fluctuate with changes in the utilization of funds, making the actual cost of borrowing uncertain. Timeswap eliminates liquidation, providing a more borrower-friendly environment. Borrower only need to repay before the maturity date, and the initial borrowing cost is fixed. Due to these advantages, such as fixed terms and rates, borrowers may be motivated to pay higher interest.
The lender lending funds is akin to selling a Put, while the borrower borrowing funds is similar to buying a Put, with the interest paid representing the option premium. When the borrower repays, it is equivalent to selling off the Put, recovering a portion of the prepaid interest. This portion of interest depends on the timing of early repayment and affects the borrower’s actual interest rate, but this impact is minimal when the repayment date is close to the maturity date.
We can see that the maximum cost for the borrower during the lending cycle is fixed, and early repayment does not impact the principal. This is different from the lender, we can also identify this characteristic in the previous detailed explanation of the principles:
In the process, the Lender utilizes Δx Long with AMM for swapping, so early withdrawal of the loan will affect the principal portion.
In the process, the Borrower only utilizes a quantity of d*Δz (prepaid interest) Short with AMM for swapping.
As Liquidity Provider
Because Timeswap is a protocol based on AMM, pricing is accomplished through AMM, and LPs serve as counterparties for both Borrowers and Lenders. LPs hold both Long and Short positions, serving as both Borrowers and Lenders. The process of becoming an LP is illustrated in the diagram below.
When LP hold both Short and Long positions simultaneously, upon maturity, Short can be redeemed for the principal, while the value of Long goes to zero. Short has the actual ability to be exchanged for the principal after maturity. Therefore, during the liquidity provision process, the situation of Short being purchased in the pool directly determines whether LPs will incur losses due to fluctuations in interest rates.
✨ Assuming LP provides liquidity, the first Borrow or Lend transaction occurs after a certain period.
Before the transaction:
z remains unchanged, and interest rates stay the same.
The quantity of Shorts that may be bought in future transactions is d*Δz ,As the time without transactions increases, d approaches 0,d*\Δz also approaches 0,The likelihood of losses for the lender decreases until it reaches 0.
After the transaction:
If the transaction is a Borrow:
z increases, and interest rates rise. Long positions in the AMM pool are bought, leaving more Shorts in the pool. In this case, LP earns additional interest income besides transaction fees.
If the transaction is a Lend:
z decreases, and interest rates fall. Shorts in the AMM pool are bought, and LP incurs losses due to changes in interest rates.
Therefore, LPs need to make some judgments about the average interest rate in the future. Being an LP during low-interest periods is a relatively low-risk decision. When LPs exit early, the reverse process of the two images mentioned earlier will occur. Depending on the situation, there may be some funds in the form of Short, which can only be retrieved after maturity.
Positive Tailwind: Will Timeswap Ascend to New Heights?
Timeswap is at the Inflection Point of Growth
Timeswap was founded by Ricsson Ngo in 2021. Ricsson Ngo holds a Master’s in Financial Engineering, is a serial entrepreneur, and formerly served as the lead editor for one of the most popular smart contract development courses on Udemy. Deeply inspired by Uniswap, Ricsson contemplated from first principles on how to use AMM to create a lending product that is permissionless and free from the need for oracles. This marked the beginning of Timeswap’s entrepreneurial journey. On his Twitter, one can find many of his in-depth reflections on the concept of time value and options.
Other core team members include:
Harshita Singh, who previously worked with Walmart and ITC in India and was the winner of the 2020 ETH India hackathon.
Ameeth Devadas, former Product Management Lead at Aurigin with a financial background, possesses over four years of experience in the crypto industry.
Timeswap went live on the testnet in October 2021, launched its v1 mainnet version in March 2022, and introduced the v2 mainnet version in February 2023. Currently, it is still in the early stages with a TVL of approximately $13 million, around 14,000 users, and deployments on seven different chains, including Polygon, Ethereum, Arbitrum, and others.
The noticeable inflection point in TVL growth from October 23, 2020, is attributed to the introduction of the Pre-mine, where participants in lending activities could earn $TIME token incentives. Additionally, TS received incentives from STIP. This once again underscores the significance of token incentives as a crucial tool for the growth of early-stage protocols. Incentives can help the protocol experiment with suitable asset categories, attract the first wave of loyal users, and generate retention. The process starts with “illusory volume” before reaching genuine volume, and this is often the case in both Web2 and Web3.
Timeswap has currently onboarded dozens of assets, covering various categories, including mainstream assets, LP Tokens, Vault tokens, long-tail tokens, LST, and more. For many of these assets, listing on Timeswap marked their first exposure to lending liquidity. Historical collaborations for Timeswap include partnerships with protocols such as Lido, GMX, Pendle, TraderJoe, Aura, Stargate, and others.
Regarding mainstream assets, Timeswap is not without advantages in competition with AAVE. The characteristics of fixed interest rates and no liquidation are borrower-friendly and can also stimulate the migration of a group of users. For Lenders, the Timeswap experience mirrors that of structured finance on CEX. Hence, there is a clear source of funding on the market.
However, user migration is challenging, especially with leading protocols possessing better branding, TVL as a barrier to entry, substantial security budgets, and a proven track record over the long term. Therefore, the primary battlefield where Timwswap can unleash its full potential lies in long-tail assets and new asset categories such as LP tokens and Vault tokens. The demand for these assets is evident, and traditional lending protocols and CEX platforms struggle to meet these demands rapidly and securely. The breakout of such assets represents a long-term trend in the DeFi industry.
In summary, we believe Timeswap has found its initial PMF and is now exploring suitable growth strategies to reach the next inflection point in terms of transaction volume and impact.
Valuation Levels of Mainstream Lending Protocols
On a quantitative level, comparing the current valuation levels of mainstream lending protocols, we can see that the ceiling for the lending track is relatively high. As a rising star, Timeswap has both vast development space and the challenge of competing with giants, requiring it to find unique survival and growth strategies.
The current valuation levels of lending protocols can be roughly divided into several tiers:
First-tier AAVE and Compound: Both are far ahead in terms of borrowing volume, TVL, and market capitalization; AAVE’s market cap exceeds $1.5 billion, indicating a high ceiling for the lending sector.
Top protocols in specific markets like Venus and Radiant: Venus is a leading lending protocol on BSC, focusing on unique assets in the BSC market. Radiant, with its cross-chain and ARB narrative, along with Ponzi tokenomics, is gaining prominence in the lending sector. Maple targets institutions and the credit market. These protocols do not introduce major innovations in mechanisms but cater to specific market segments, with FDVs ranging from $100–300 million.
Euler belongs to the category of innovative protocols, showing some Product-Market Fit (PMF) and surpassing the early stages of development for DeFi protocols. Before being hacked, Euler had a borrowing volume of $225 million, and its FDV reached nearly $200 million.Lending protocols with single-point innovations, such as Gearbox and Silo: Gearbox v2 supports leverage strategies after borrowing, and Silo supports long-tail assets by isolating lending pools. Both protocols currently have Lending volumes in the millions and circulating market caps below $100 million. These protocols showcase innovative mechanisms but are at a stage where PMF hasn’t been fully validated, serving as a benchmark for the lower limit of Timeswap’s potential.
Timeswap currently falls into the third category, with its last funding round in October 2021 reaching a Fully Diluted Valuation (FDV) of $40 million. The round was led by @MulticoinCap, with participation from @MechanismCap and @DeFianceCapital. It also boasts a prestigious lineup of angel investors, including Polygon founder @sandeepnailwal and former Coinbase executive @balajis. This, to a certain extent, adds a positive endorsement for a DeFi protocol that values its reputation.
Seeking the Promised Land: Timeswap’s Journey to Value Enhancement
Let’s contemplate the indicators of Timeswap’s next phase of development (internal factors) and potential catalysts and emerging trends (external factors) that could propel its intrinsic value towards the next level, potentially reaching hundreds of millions of dollars.
Some potential points may include:
Leveraging hot topics to find narratives that resonate more with the community and ordinary users
Successful adoption of the protocol requires aligning technical feasibility with operational strategy, which may not always be identical. Lowering barriers and gaining user recognition are crucial. As Julian, the founder of Aevo, recently tweeted, capturing user attention is a fundamental skill at this moment. Fundamentally, the competition is for the same liquidity, and whoever can capture more significant user mindshare and attention has a higher chance of success.
Timeswap’s current concept of being the Uniswap of the lending space leans more towards functional descriptions, which may seem technical and less likely to convey value to a broader audience, including traditional institutional clients. The next step for Timeswap might involve clearly communicating its core value propositions to users and leveraging the momentum of new narratives that capture attention. Timeswap needs to find a compelling narrative that can significantly elevate its business scale and brand reputation.
With the recent rise in LRT popularity, Timeswap timely added the LRT ETH lending market for WETH/PT-weET, offering substantial $TIME token rewards and the maximum potential yield can reach over 160% through looping borrowing and lending. Although the pool depth is currently limited, we see this as a positive signal, indicating the team’s ability to quickly respond to market trends and their strong business development and partnership-building capabilities.
Becoming the leading lending protocol on a new blockchain
In Timeswap’s 2024 outlook, it outlines an “aggressive” multi-chain expansion plan, aiming to extend its presence to various chains such as Monad, Berachain, X1, Solana, SUI, SEI, INJ, and more. While the specific logic behind the team’s choice of chains is not clear, from a liquidity perspective, new L2s typically have shallow liquidity, making pool prices susceptible to manipulation. Timeswap’s AMM pricing is less constrained by this limitation, allowing for early deployment on new chains. Usually, new chains come with token incentives, boosting APY and attracting users to join. If Timeswap can establish a leading position on a well-developed new chain, it can bring substantial growth and brand exposure.
Accelerated Rise of Options Demand
While this article predominantly explores Timeswap from the perspective of a lending protocol, it also ingeniously operates as an on-chain options protocol, effectively implementing option pricing. Presently, the overall options market in the crypto space is in its nascent stages, particularly with on-chain options protocols remaining relatively niche. Timeswap, possessing the dual characteristics of a lending and options protocol, is well-positioned not only to enhance the effectiveness of price discovery but also hints at the potential for increased involvement in the burgeoning on-chain options market.
Although the turning point in the options market is not yet evident, the entry of institutional clients with more mature and substantial hedging needs could potentially provide significant impetus to expedite the development of this sector. During this period, Timeswap might choose to highlight this particular feature, introducing a dedicated options UI. Furthermore, owing to Timeswap’s features in options and structured products, it could also serve as the foundational infrastructure for numerous options protocols and financial products on CEX.
Our Investment Judgment
Summary of Perspective
The on-chain lending protocol market has a high ceiling, with a historically stable market structure dominated by a near-monopoly market leader. It is also one of the few areas in the crypto space where the business model has been extensively validated. However, in reality, the on-chain lending market is still in its early stages, and today we have only illuminated a small corner of the comprehensive map of on-chain lending protocols.
The emerging assets such as long-tail assets and LP assets are the true gems and unstoppable trends in the on-chain space. The unique advantage of DeFi protocols lies in their support for these types of assets. With its innovative, concise, effective, and highly scalable protocol design, Timeswap has the opportunity to tap into this market segment and even become a new leader and protocol paradigm. The team is already conceptualizing the V3 version of the protocol. We are anticipating its realization of a better PMF.
At present, Timeswap’s operational initiatives have just begun. From an optimistic perspective, Timeswap may be on the verge of an surge, reaching for the stars and the sea. However, transformation is always challenging and filled with uncertainties. The success or failure of the protocol depends on whether subsequent operations can seize opportunities, whether PMF can be validated on a larger scale, and whether it can capture the minds of the public. Currently, Timeswap’s valuation is 40 million. Considering the ceiling of lending and the overall valuation of the sector, along with the innovative assessment of Timeswap, we believe that the current valuation of 40 million still offers investment potential. It is worth betting on and continued attention.
Yield strategy
Timeswap is set to conduct its TGE in Q1. Currently, details regarding the economic model of $TIME and the TGE method/price have not been disclosed. We will analyze investment value and participation methods further once the TGE details are released. Currently, acquiring $TIME is possible through participating in the Premine. By engaging as a Borrower/Lender on Timeswap, token incentives in $TIME can be earned. According to the FDV of $TIME during the most recent round of investment, most pools are expected to have an annualized incentive of 30% to 100% in $TIME.
During this phase, obtaining $TIME is achievable through participation in the Premine. The primary assets on Timeswap are long-tail assets. To mitigate collateral price risk and maximize rewards, a market-neutral strategy can be employed. For example, using the USDC/ARB pool, you can collateralize ARB and borrow USDC:
Borrow 50 ARB from other lending protocols using mainstream assets.
On Timeswap, act as a Borrower, using the 50 ARB as collateral to borrow USDC, with a TP of 1.2. This means borrowing 60 USDC using 50 ARB.
Act as a Lender, deposit the 60 USDC into Timeswap, where the collateral corresponds to 50 ARB.
In Timeswap, maintain two positions with opposing directions but consistent in size. Regardless of the market price and TP relationship at maturity, you will always be able to retrieve 50 ARB.
The ABR can then be repaid to the lending protocol used in step 1, completing the entire yield strategy
This process outlines a market-neutral yield strategy with no ARB price exposure. There might be slight capital loss due to spreads during the deposit and withdrawal of funds.