Timeswap - A New Paradigm for Lending Protocols

Author’s Note 🔖

Lending is as significant as trading with strong demand, yet the development of on-chain lending protocols lags far behind trading protocols. Unlike the flourishing on-chain trading protocols, most lending protocols currently only support a few mainstream assets, making them less competitive than centralized exchanges (CEX).

The rise of on-chain protocols relies on two factors - strong user demand and the explosion of new asset categories. These two factors have fueled the prosperity of on-chain protocols, creating their unique barriers compared to CEX. We believe that lending protocols do not run short of user demand or new asset supply, but they currently lack an important catalyst - the right protocol design paradigm.

The essence of lending is the transfer of time value, and the pricing of interest rates is actually the pricing of time value. Traditional lending protocols use “oracle + governance parameters” for pricing, which has obvious limitations. However, Timeswap (https://timeswap.io/) takes a different approach, separating the time value from spot tokens, using AMM trading to price the time value, and providing a novel and elegant lending solution. Because it eliminates the need for oracles, Timeswap can support any asset permissionlessly, breaking the bottleneck of previous lending protocols and creating a competitive experience for both lenders and borrowers.

Timeswap’s protocol design is innovative and aligns with market trends. We believe that Timeswap has the potential to carve out a place in the billion-dollar lending protocol space. Meanwhile, Timeswap is still in its early stages, with a TVL just over $10M. Recently, it has gradually increased its operational activities (such as entering the LRT field), showing some promising growth potential. Currently, Timeswap is using $TIME for liquidity incentives and plans to officially launch $TIME in Q1. Timeswap’s last round valuation was $40M FDV. Considering its potential, we believe that $TIME is an attractive asset at this valuation and worth paying attention to 📈

Contents👀

1. The Weakness of Lending Protocols - Oracles and Governance
2. Timeswap’s Unique Solution - Separation and Pricing of Time Value
   2.1 Lender Sells Time Value
   2.2 Borrower Buys Time Value
   2.3 Summary
3. Different Perspectives on Timeswap
   3.1 Lender’s Perspective
   3.2 Borrower’s Perspective
   3.3 Liquidity Provider’s Perspective
4. Can Timeswap boom with the coming exciting opportunities?
   4.1 Timeswap at a Turning Point in Growth
   4.2 Valuation Levels of Mainstream Lending Protocols
   4.3 Seeking Promising Ground - Timeswap’s Path to Enhanced Value
5. Our Investment Judgment
   5.1 Conclusion
   5.2 Profit Strategies

The Weakness of Lending Protocols - Oracles and Governance

In the DeFi world, lending protocols may be the least “DeFi” type of protocols, as they rely heavily on governance and off-chain data (Oracle), unlike the long-term vision of DeFi protocols, which are permissionless, ungoverned, and non-upgradable. The current mainstream lending protocols use an over-collateralization model, where users need to collateralize excess assets to borrow, for example, staking $100,000 worth of WBTC to borrow $50,000 worth of USDC. Over-collateralization is the only feasible lending model in the current DeFi world because there are no identities or courts in the crypto world. The only thing that motivates borrowers to repay is that the collateral is more valuable than the borrowed assets, without the concept of credit.

An increase in user debt interest or a relative decrease in WBTC price compared to USDC may result in users being unable to cover their debts. In such cases, borrowers may default on repayment, prompting the need to liquidate user positions in advance. For example, when the WBTC price drops to $80,000, liquidation begins, allowing a third-party liquidator to take away $80,000 worth of collateral and repay the $50,000 loan on behalf of the borrower. The liquidation threshold is crucial to ensure that liquidators have sufficient incentive to perform liquidation, avoiding situations where liquidators lack motivation due to rapid price declines or insufficient market liquidity, leading to bad debts.

In the above description, we can see that lending products need to know prices and market liquidity to initiate liquidation correctly. However, for an asset: 1) it may have trading pairs on multiple chains and multiple DEXs/CEXs; 2) its price and market liquidity cannot be easily obtained. For these two off-chain pieces of information, the former requires oracles to provide prices, while the latter relies on governance - manually setting parameters such as LTV/Borrow Cap.

Obviously, many off-chain and human intervention links have been added to the current paradigm of lending protocols, making it less trustless. This design is not only imperfect but also makes lending protocols more dangerous and less scalable. Trusting oracles offers an additional layer of trust, and there are issues such as quoting errors/delays and accuracy problems. According to Messari’s report, as of February 21, 38% of the funds lost in DeFi due to hacking incidents came from oracle price feeding issues, while the 34% share of flash loan attacks may also be related to price manipulation to some extent:

The governance parameters set by humans naturally cannot guarantee that they will always be able to respond to various market emergencies. Moreover, both of these methods are not scalable and are difficult to support new asset types, such as LP tokens or long-tail assets.

The limitations of the old lending paradigm are evident, as lending protocols with classical designs are only suitable for a few mainstream assets with very conservative protocol parameters. Comparing the lending markets of CEX and DeFi, for example, CEX can support lending for dozens of assets, while DeFi platforms like Aave and Compound only support lending for a dozen or so mainstream assets. From this perspective, the gap between decentralized and centralized lending markets is much larger than that between DEX and CEX.

For lending protocols, the most important competitive tool is asset support. New protocols often differentiate themselves by adopting more aggressive asset onboarding methods, but under the old protocol design paradigm, this can easily lead to other risks. Even slightly more aggressive protocols like AAVE, compared to Compound, have experienced defaults due to its support for assets like CRV, and have been affected each time there’s a CRV-related issue. Meanwhile, other more aggressive lending protocols have faced serious attacks, with some even shutting down completely:

• Venus, after suffering multiple attacks, is already insolvent: https://twitter.com/WazzCrypto/status/1623078934836310017
• Mango, after being manipulated by oracle attacks, has lost over $100 million: https://twitter.com/mangomarkets/status/1579979342423396352
• Rari, subjected to oracle price manipulation attacks, has since closed its protocol: https://twitter.com/RariCapital/status/1455569653820973057
• …… (There are really too many examples)

The on-chain lending protocols are suffering a bottleneck, but at the same time, new assets are emerging on-chain. Therefore, we can see that among the top 20 tokens by volume on Uniswap, approximately 30-50% of tokens are not listed on Binance, and more than half are not supported by Aave/Compound. In addition to long-tail assets, emerging asset types are also a unique feature of the on-chain world compared to CEX. For example, LP Tokens, GMX’s GLP and GM have a TVL of over 500 million, which is 1/6 of the ETH TVL on ARB, and there are obvious lending scenarios. However, the demand for lending for these two types of assets is difficult to meet by CEX/existing lending protocols.

Timeswap’s Unique Solution - Separation and Pricing of Time Value

There have been many lending protocols exploring the long-tail asset field, such as Euler, Silo, and many isolation pool protocols, but they have not escaped the paradigm of classic lending protocols and have only made improvements based on the existing paradigm. Teller/Blend eliminates the reliance on oracles, but it requires both parties to manually set interest rates and conduct peer-to-peer matching on-chain, which has high threshold and low efficiency, especially in low-performance on-chain environments.

Timeswap is a very interesting protocol that we discovered recently. They eliminate the dependence on oracles/governance parameters by canceling the liquidation process. At the same time, compared to Teller/Blend, Timeswap uses AMM to solve the allocation of responsibilities between lenders and borrowers and the pricing of interest rates/risk, which is more suitable for low-performance on-chain execution environments.

The essence of lending is an exchange of time value, where lenders are willing to sacrifice liquidity by selling the time value of their funds to borrowers during a specific period. The design of the Timeswap protocol also adheres to this consistent approach, which is likely the origin of the name “Timeswap” ⏳.

In Timeswap, there are different lending pools, and the creators of the pools will specify the asset pairs (A/B), maturity dates, and transition prices (TP) when setting up the pools, as shown in the diagram below. Pools with different maturity dates and TP will be divided into multiple pools.

In Timswap’s design, there is no mandatory liquidation, and it introduces the unique concept of Transition Price (TP), which is the critical price at which borrower behavior switches. Taking the USDC/ETH trading pair as an example, when a borrower stakes ETH and borrows a certain amount of USDC, it can be anticipated that when the price of ETH goes up, the borrower will repay to retrieve ETH, and when the price of ETH is goes down, the Borrower would rather default and continue holding USDC, with the collateral being handed over to the lender. Therefore, the lender bears the loss without the presence of a liquidator. In essence, the lender is similar to selling a Put option, and the fixed interest income is the option premium.

We can see that the payoff curve for the lender is consistent with that of an option:

Lender Sells Time Value

To analyze the protocol design path of Timeswap carefully, we need to start from the perspective of the lender. Suppose Alice is a lender, ready to lend out K USDC for a loan term of 1 month. At this point, Alice pays out K USDC and receives two types of tokens:

• One token can be understood as a “promissory note,” represented by Short in the graph. Through this promissory note, Alice can retrieve the principal of K USDC after 1 month, but cannot use the funds during this month.
• The other token, represented by Long USDC in the graph, represents the time value of K USDC for one month. During this period, Bob can freely trade this “time value.”

In the Timeswap protocol, the contract responsible for this separation of time value is called Time Option, and this process can also be reversed before expiration. After expiration, Short can be exchanged for the principal, while Long USDC loses its value.

Relatively speaking, the pricing logic for Short is more explicit than for Long, so Timeswap uses Short to price Long. Based on the Time Option contract, Timeswap has developed the Timeswap AMM for the exchange between the two derivative tokens (Long and Short).

Through the AMM, lenders can exchange Long USDC for Short, and after expiration, these additional Shorts can also be exchanged for spot. Therefore, these Shorts represent the interest earned by the lender.

The specific AMM formula is as follows:

x represents the number of units of Long USDC in the pool, and y represents the number of units of the token Long ETH. However, since arbitrageurs will take away the asset with the higher external price from the pool, at any given moment, the pool will only contain Long USDC or Long ETH, which means y = 0 or x = 0. Timeswap describes this characteristic as symmetry, so the formula that actually applies in Timeswap is:

z represents the interest per second, and k is a constant product. Interest is paid with Short, so when a lender deposits Δx/Δy to exchange for Δz through Swap, they will withdraw Δz*d Shorts from the pool based on the remaining time d.

The reason why the variable z is used in the AMM formula to indirectly achieve the exchange between Long and Short is because lending protocols have the following two characteristics:

• The loan interest rate is inversely proportional to the utilization rate of the borrowable amount; the higher the utilization rate, the higher the interest rate.
• Under the same interest rate, the longer the borrowing period, the higher the cumulative interest, which is positively correlated with the borrowing duration.

These characteristics describe the interest rate rather than the interest itself, so in the formula, the part of the interest that is separated from time needs to be extracted. Short represents the total interest, and by stripping away the time component, we get the interest per second z. The interest rate formula is:

According to the logic mentioned earlier, Long USDC is positively correlated with the amount of USDC deposited. So, as the lender deposits more USDC and x increases, z decreases, meaning the interest rate decreases, and vice versa. The interest rate and the funds behave like a seesaw. The variation of variables follows the operational rules of the lending protocol. We believe that Timeswap has constructed an effective AMM formula.

Therefore, the complete lending process for the lender is as follows:

Separate the time value Long USDC through the Time Option contract, and then swap it for Short through AMM Swap, sacrificing time value to earn interest. Since the interest is only available for withdrawal after expiration and the total amount is fixed at the time of Swap, the effect for the lender is similar to a fixed interest rate.

Borrower buys time value

While the Lender sells time value, the Borrower operates in the opposite direction, needing to buy time value. To achieve this, we introduce another feature of Timeswap: the Transition Price (TP).

In the Timeswap protocol, the exchange rate between collateral and borrowed assets 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 one unit of Short and the corresponding Long:

When the Lender deposits USDC, it represents lending funds, while when the Borrower deposits ETH, it represents depositing collateral. If the spot price is higher than TP, it constitutes overcollateralization. Conversely, if the spot price is lower than TP, the pool function reverses, exhibiting 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, establishing the following relationship:

By depositing ETH, users can convert Long USD into Long ETH and retrieve USDC.

With this, the borrowing behavior of the Borrower can proceed as follows:

1. The Borrower deposits ETH, which can be seen as the process of depositing collateral (as indicated by the red box in the diagram).
2. The Borrower obtains Long USDC through Swap and exchanges it for real USDC, representing the process of borrowing USDC. At this moment, the Swap rate determines the interest rate. Thus, for the Borrower, Timeswap also acts as a fixed-rate protocol (as indicated by the yellow box in the diagram).
3. The remaining Long ETH serves as collateral (as indicated by the green box in the diagram).

When it comes time to repay the loan, the process runs in reverse:

• Using USDC + Long ETH to acquire collateral ETH + Long USDC.
• Some of the Long USDC can be exchanged for Short, then combined with Long to form spot assets, partially offsetting the USDC needed for repayment.

In summary, we have provided a comprehensive overview of the process by which Borrowers buy time value (i.e., borrowing) in the Timeswap protocol.

Summary

Overall, the design of Timeswap is very clever. The Time Option contract separates the time value and principal of spot tokens, similar to how Pendle separates the interest earnings of idle assets from the principal, making this portion of value more naturally tradable and usable. In comparison, some fixed-rate protocols forcibly lock tokens, leading to a price differential with spot assets, which essentially results in waste.

The AMM design of Timeswap is also characterized by simplicity and fluidity, reminiscent of our initial impressions when encountering the Uniswap formula for the first time. Through some clever innovations, the logic of variable changes in the formula aligns with the business logic of user scenarios, making it an elegant and classic AMM design approach.

Different Perspectives on Timeswap

Lender’s Perspective

When Lender deposits funds:

• If the collateral price is higher than TP at maturity, the Lender can retrieve the principal and earn fixed-rate income: Δz*d.
• If the collateral price is lower than TP at maturity, and the Borrower has no incentive to repay, then the Lender can obtain collateral worth “principal + Δz*d” at the TP price from the pool. Because the external market price of collateral is lower than TP at this time, this will result in a loss. Therefore, when lending funds, Lenders need to make judgments about future prices.

In the example provided, the Lender essentially sells an ETH Put with a strike price of TP, while the fixed income represents the option premium. This design is similar to the popular structured financial product “Dual Currency Product” in CEX, meeting a common mindset among crypto users: making price judgments, being willing to “buy at the bottom” or “sell at the top,” without excessive timing. In addition to purchasing Dual Currency Products, many users have the habit of selling naked Puts or covered calls.

Furthermore, Timeswap adds some flexibility, as Lenders do not have to wait until the maturity date to withdraw funds and can do so in advance. Borrowing is akin to selling a Put, while withdrawing assets is akin to buying a Put/replicating borrowing at the latest rate. Therefore, withdrawing assets early is equivalent to trading options/performing rate swaps, with the risk of losing principal. Hence, it’s preferable for Lenders to borrow when rates are high and withdraw when rates are low. For Lenders without the ability to predict interest rate changes, it’s best to hold the debt until maturity, at which point they will receive the principal plus fixed income.

Borrower‘s perspective

When borrowing, the Borrower will deposit the collateral required for “principal + accrued interest” into the protocol upfront, meaning they need to prepay all interest at once. The Borrower needs to repay before the maturity date, and if they fail to do so, 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, suppose the current price of ARB is $2, and TP is $1. In this case, each unit of ARB can borrow 1 US dollar, with an LTV of 50%. The closer TP is to the market price, the higher the LTV and the higher the capital interest rate. However, at this point, the Lender bears higher risk, so generally the interest rate will also be higher.

Lending funds by Lenders is similar to selling a Put, while borrowing funds by Borrowers is similar to buying a Put, with the interest paid acting as the option premium. When Borrowers repay, it is akin to selling the Put and receiving back a portion of the interest. The amount of interest received depends on the time of early repayment, affecting the Borrower’s real interest rate, although this impact is very weak when the repayment date is close to the maturity date.

We can see that the maximum cost of the Borrower’s borrowing cycle is fixed, and early repayment will not affect the principal. This differs from the Lender, as outlined in the previous explanation:

• In the process, Lender uses ΔxLong swaps with AMM, so withdrawing the loan early will affect the principal.

• In the process, Borrower only uses a quantity of d*Δz (prepaid interest) of Short to Sway with the AMM.

Liquidity Provider’s Perspective

Since Timeswap is a protocol based on AMM, completing pricing through AMM requires LPs to act as counterparties for both Borrowers and Lenders, holding both Long and Short positions. Becoming an LP involves the following process:

When LPs hold both Short and Long positions, Short can be converted into principal after maturity, while Long will be zeroed out. Short has the ability to be truly converted into principal after maturity, so the situation where Short is purchased in the pool during liquidity provision directly determines whether LPs will incur losses due to fluctuations in borrowing rates.

✨ Assuming that LP provides liquidity, the first Borrow or Lend transaction occurs after a certain period of time.

Before the transaction:

• z remains unchanged, the interest rate remains unchanged
• The number of Shorts that may be bought in future transactions is dΔz. As the no-trading time increases, d approaches 0, dΔz will also approach 0, and the possibility of Lender suffering losses decreases until it reaches 0.

After the transaction occurs:

• If the transaction is for Borrowing:
  As z rises, interest rates rise, Longs in the AMM pool are bought, and more Shorts remain in the pool, then LP has additional interest income in addition to transaction fees.

• If the transaction is for Lending:
  As z decreases and the interest rate decreases, Shorts within the AMM pool are bought up, leading to potential losses for LP due to changes in interest rates.

Therefore, LPs need to make certain judgments regarding future average interest rates. It’s generally a lower-risk decision to become an LP when interest rates are low. When LPs exit prematurely, the process reverses, and depending on the situation, there may be some funds remaining in the form of Shorts that can only be retrieved after maturity.

Can Timeswap boom with the coming exciting opportunities?

Timeswap is at a turning point in growth.

Timeswap was founded by Ricsson Ngo in 2021. Ricsson Ngo holds a master’s degree in financial applied mathematics and is a serial entrepreneur. He was also a former editor of one of the most popular smart contract development courses on Udemy. Inspired by Uniswap, Ricsson delved into the first principles of how to use Automated Market Maker (AMM) to create a permissionless and oracle-free lending product, thus embarking on the entrepreneurial journey of Timeswap. His Twitter account reflects his deep thoughts on time value and options.

Other core members of the team include:

• Harshita Singh, previously at Walmart and ITC India, and winner of the 2020 ETH India Hackathon.
• Ameeth Devadas, formerly the head of product management at Aurigin, has a financial background and has more than 4 years of experience in Crypto.

Timeswap launched its testnet in October 2021, followed by the mainnet v1 launch in March 2022, and the mainnet v2 launch in February 2023. Currently, it is still in its early stages with a Total Value Locked (TVL) of approximately $13 million, around 14,000 users, and deployed on 7 chains (including Polygon, Ethereum, Arbitrum, etc.).

Source: https://analytics.timeswap.io/

From October 20, 2023, there is a noticeable inflection point in its Total Value Locked (TVL) growth, stemming from the introduction of Premine at that time, where participating in lending can earn $TIME token incentives. Additionally, TS also received incentives shares from STIP. This once again reflects the importance of token incentives for early-stage protocols. Incentives can help protocols experiment with suitable asset categories, attract the first wave of loyal users, and create retention. “Fake volume” often precedes real volume, as is often the case in both Web2 and Web3.

The assets currently listed on Timeswap span across various categories, including mainstream assets, LP Tokens, Vault tokens, long-tail tokens, LST, and more. For many of these assets, being listed on Timeswap provides their first exposure to lending liquidity. Historically, Timeswap has collaborated with protocols such as Lido, GMX, Pendle, TraderJoe, Aura, Stargate, among others.

In terms of mainstream assets, Timeswap competes with AAVE, but not without advantages. Its fixed-rate and non-liquidation features are borrower-friendly and can also facilitate the migration of users. For lenders, Timeswap offers an experience similar to structured products on centralized exchange (CEX), thereby providing a clear source of capital supply in the market.

However, user migration is always challenging. Top protocols have better branding, TVL as a barrier, a sufficient security budget, and a long-term market-tested track record. Therefore, Timeswap’s potential can be fully realized in the main battlefield, focusing on long-tail assets and new asset categories such as LP tokens and Vault Tokens. The demand for these types of assets is evident, but traditional lending protocols and CEXs cannot meet them quickly and safely, and the explosion of such assets is a long-term trend in the DeFi industry.

In conclusion, we believe that Timeswap has found its initial Product-Market Fit (PMF) and is exploring appropriate growth strategies to reach the next inflection point in trading volume and impact level.

Valuation levels of mainstream lending protocols

Quantitatively, comparing the current valuation levels of mainstream lending protocols, we can see that the ceiling of the lending track is relatively high. As a rising star, Timeswap has vast room for development on one hand, but on the other hand, it also faces giants and needs to find unique strategies to survive and develop.

Source: Defillama, Tokenterminal, 202401*: Seed round valuation in October 2021

The current valuation levels of lending protocols can be roughly divided into several tiers:

1. First-tier protocols like AAVE and Compound: Both are far ahead in terms of borrowing volume, TVL, and market capitalization. The market capitalization ceiling of AAVE exceeds $1.5 billion+.
2. Top protocols in niche markets such as Venus, Radiant: Venus is a top lending protocol on BSC, focusing on unique assets in the BSC market. Radiant, leveraging cross-chain + ARB narrative and ponzi tokenomics, has also emerged in the lending track. Maple focuses on institutions and credit markets. These lending protocols have no major innovations in mechanism but are exclusive to specific niche markets, with FDV ranging from $100 million to $300 million.

Innovative protocols like Euler: Euler belongs to the innovative category, with a certain PMF and breaking through the primary stage of DeFi protocol development. Before being hacked, Euler had a borrowing volume of $225 million, and a FDV of nearly $200 million.

1. Innovative single-point lending protocols like Gearbox and Silo: Gearbox v2 supports leveraged lending strategies, while Silo supports long-tail assets by isolating lending pools. The borrowing volume of both protocols is currently at the million-dollar level, with a fully diluted market cap of less than $100 million, and circulating market cap in the tens of millions level. These protocols are innovative in mechanism but are in the stage of not fully validating PMF and have not yet exploded, representing the lower limit of Timeswap.

Timeswap currently belongs to the third tier protocols, with its last round of financing (in October 2021) having an FDV of $40 million, led by @MulticoinCap, with participation from @MechanismCap and @DeFianceCapital. It also has a prestigious team of angel investors, including Polygon founder @sandeepnailwal, Coinbase former executive @balajis, etc. For reputation-conscious DeFi protocols, this to some extent strengthen positive endorsement.

Seeking Promising Ground - Timeswap’s Path to Enhanced Value

Let’s imagine the next steps in Timeswap’s development, considering both internal factors and potential catalysts and trends (external factors) that could lead its intrinsic value to the next stage of several hundred million dollars.

Some potential points may include:

• Leveraging hot topics to find narratives that resonate more with the community and ordinary users:

From the perspective of successful adoption of the protocol, what can be done in terms of technical feasibility and what should be done in terms of operational strategy are sometimes not entirely identical. It’s crucial to appropriately lower barriers and gain user acceptance. Quoting a recent tweet from Julian, the founder of the derivative platform Aevo, to attract user attention is a fundamental skill in the current landscape. Essentially, everyone is competing for the same share of liquidity. Those who can capture a larger share of user mindshare and attention have a higher chance of success.

Source: https://twitter.com/juliankoh/status/1749047185080225835

Timeswap is currently positioned as a lending protocol, akin to the Uniswap concept but more focused on functionality rather than ease of understanding. This makes it challenging to communicate its value proposition to a wider audience of DeFi users, let alone traditional institutional clients. The next step for Timeswap may involve clarifying its core value proposition and leveraging new narrative trends to attract attention. Timeswap needs to find a compelling narrative and deepen its engagement with this narrative to elevate its business scale and brand reputation.

Recently, there has been a surge in interest in LRT, and Timeswap timely launched the LRT ETH lending market for WETH/PT-weET, offering high $TIME token rewards. Through circular borrowing, yields can reach over 160%. Although the pool depth is currently not significant, we see this as a positive signal indicating the team’s ability to quickly respond to market trends and their strong business development capabilities.

• Becoming a leading lending protocol on a new blockchain

In Timeswap’s 2024 outlook, it outlines an “aggressive” multi-chain expansion plan to expand to Monad, Berachain, X1, Solana, SUI, SEI, INJ, and other chains. Although the team’s logic in selecting specific chains is not clear yet, from a liquidity perspective, new L2s typically have shallow liquidity, and pool prices can be easily manipulated. Timeswap’s AMM pricing value is less constrained by this, making it suitable for early deployment on new chains. New chains often come with token rewards, boosting lending APY and attracting users to join. If Timeswap can establish a leading position on a well-developed new chain, it can bring significant incremental growth and brand exposure.

• Rising demand for options may accelerate

This article mainly discusses Timeswap’s principles and scenarios from the perspective of a lending protocol. However, Timeswap is also an on-chain options protocol that cleverly prices options. Currently, the crypto options market is still in its early stages, especially on-chain options protocols, which are still niche. Timeswap combines the characteristics of lending protocols and options, promoting price discovery effectiveness and hinting at the potential for deeper involvement in the on-chain options market in the future.

Although it’s difficult to foresee a clear turning point in the options market at the moment, the entry of institutional clients with more mature and substantial hedging needs may provide significant impetus to accelerate the development of this field. At that time, Timeswap may also highlight this feature and introduce a dedicated options UI. Additionally, as Timeswap possesses characteristics of options and structured products, it may serve as the underlying infrastructure for many options protocols and CEX financial products.

Our investment judgment

Conclusion

The on-chain lending protocol market has a high ceiling, with a relatively stable market landscape dominated by market leaders, representing one of the few areas in crypto that has validated business models. However, the on-chain lending market is still in its very early stages, and today we’ve only illuminated a small corner of the broader picture of on-chain lending protocols.

Long-tail assets, LP assets, and other emerging assets are the true gems and unstoppable trends of on-chain finance; supporting these assets is the unique advantage of DeFi protocols. Timeswap’s innovative, concise, effective, and scalable protocol design has the opportunity to unlock this part of the market and even become a new leader and protocol paradigm. The team is already conceptualizing the V3 version of the protocol, hoping to achieve better product-market fit.

Currently, Timeswap’s operational actions are just beginning. On the positive side, Timeswap may be on the verge of an explosion, venturing into uncharted territory. However, transformation is always difficult and full of uncertainty. The success or failure of the protocol depends on factors such as whether subsequent operations can seize opportunities, whether PMF can be validated on a larger scale, and whether it can capture the minds of the masses. With Timeswap’s current valuation at $40 million, considering the ceiling of lending and the overall valuation of the sector, coupled with an assessment of Timeswap’s innovativeness, we believe that there is still room for investment at the current valuation of $40 million, making it worth considering and closely monitoring.

Revenue strategy

Timeswap will conduct its TGE in Q1, and currently, the economic model of $TIME, TGE methods/prices have not been disclosed. We will further analyze the investment value and participation methods after the TGE details are announced. Currently, the way to obtain $TIME is to participate in Pre-mine, where you can earn token incentives by acting as a Borrower/Lender on Timeswap. Most pools will have a 30% to 100% annualized $TIME incentive based on the previous round’s FDV valuation.

At this stage, you can obtain $TIME by participating in Pre-mine. As the assets on Timeswap are mainly long-tail assets, to avoid the impact of collateral price risk and fully obtain rewards, you can use the following market-neutral strategy: (using the USDC/ABR pool as an example, collateralizing MNT to borrow ABR)

• In other lending protocols, borrow mainstream assets to lend out ARB, for example, borrow 50 ARB.
• In Timeswap, as a Borrower, use ARB as collateral to borrow U, for example, if TP is 1.2, then borrow 60 USDC using 50 ARB.
• Then, as a Lender, deposit the 60 USDC into Timeswap, where the collateral corresponds to 50 ARB.
• In Timeswap, have two positions with opposing directions of the same size, ensuring that regardless of the market price and TP relationship, you can always retrieve 50 ARB at maturity.
• Finally, repay ABR to the lending protocol used in step 1 to complete the entire investment strategy.

The above process is a market-neutral mining strategy without ARB price exposure, with slight capital erosion due to the spread when depositing and withdrawing funds.

Disclaimer：

1. This article is reprinted from [BuidlerDAO], All copyrights belong to the original author [BuidlerDAO]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
3. Translations of the article into other languages are done by the Gate Learn team. Unless mentioned, copying, distributing, or plagiarizing the translated articles is prohibited.