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Timeswap — Most Capital Efficient Money Market in DeFi

While we have robust money market protocols in DeFi today, there are countless inefficiencies that needs to be addressed to fulfil the promise of superfluid collateral.

One of the seminal moments in the evolution of DeFi was the concept of superfluid collateral introduced by Dan Elitzer in Feb 2019. In that Dan speaks about collateral sitting idle within Maker CDPs to be utilized in other lending / borrowing markets to earn yield. Or ERC-20 liquidity tokens from Uniswap being used as collateral in money market protocols. All these point towards fundamentally improving the capital efficiency of various DeFi protocols. So what has happened since then?

Where are we now

Since 2019 a lot has changed. DeFi went from being a niche to $88 billion in total value locked. Uniswap made AMMs mainstream, DeFi summer unleashed a wave of food tokens, we’ve had vampire attacks, fair launches, oracle hacks, MEV attacks, rugpulls and a lot more. Suffice to say 1 day in DeFi is 1 year in TradFi.

Maker, Aave and Compound have led the charge in collateralized markets with over $40 billion value locked in these protocols. While these protocols have firmly established robust money markets there are always areas of improvement.

Over-Collateralization Conundrum

Over-collateralization is how all DeFi money market protocols secure their lenders assets. DeFi today is deeply capital inefficient, primarily due to lack of decentralized identity and reputation scores that can be utilized for under collateralized lending.

Even though we do not have the necessary infrastructure to provide under collateralized loans, we can always improve the existing collateralization mechanisms. Some of the inefficiencies in the existing protocols are:

  • Non standard collateralization of assets: For the same assets, different protocols have different collateralization ratios. While some protocols have 150% others have 200%+ or more. Also different assets having the same collateralization ratios within one protocol despite having vastly different risk profiles.
  • Governance overhead: Protocols having to go through governance to decide the collateralization ratio for assets leading to additional overhead
  • Expensive Oracles: Needing expensive oracles to maintain overcollateralization of the protocol making them vulnerable to oracle hacks
  • Permissioned markets: Only select assets can be used as collateral within existing markets thereby reducing capital efficiency for long tail assets

Timeswap Solution

At Timeswap one of our primary goals is to improve the capital efficiency across DeFi. Timeswap pools are designed such any ERC-20 token can be used as a collateral and users can choose collateralization levels they are comfortable with, thereby greatly improving capital efficiency.

Users can select collateralization based on their view of the collateral, rather than what is decided by the protocol.

  • As pools are market driven, a community can decide what should be the collateral factor for their token instead of it being decided by an external protocol via governance voting. This enables communities to self-organize and create greater value amongst themselves without any external influence.
  • Borrowers can lock additional collateral to reduce their interest rate or choose to lock lower collateral to borrow the same amount of capital albeit paying higher interest rate but significantly improving their capital efficiency
  • Lenders can customize the collateral coverage of their lent amount; higher collateral coverage for safer lending albeit at lower interest rate or vice versa.

This allows for participants across the risk spectrum to pool together in one pool and greatly improve liquidity as well as capital efficiency.

You no longer have the overhead of governance or needing expensive oracles to maintain sufficient collateralization of the lenders assets, instead market driven collateral ratios & interest rates drive greater capital efficiency, thereby truly bringing the era of superfluid collateral!

Time preference as a liquidity blackhole

Timeswap also has only one major differentiating factor for capital provisioning: the maturity of a pool. Users with lower time preference will lock their liquidity for much longer than those without. Understandably, this means that liquidity will gravitate towards a convergent horizon, all else being equal.

So, what is this convergent horizon? To put it succinctly, it can be thought of as the event horizon of a black hole. Like a black hole, the pool with the most favourable parameters will suck in all the liquidity in its temporal sphere, i.e, the only real differentiating factor is the maturity period of the pool.

This greatly improves capital efficiency by market self reinforcing liquidity to pools that has highest market demand i.e instead of global liquidity being pooled into a single pool across multiple time preferences, our pools capture the local minima and maxima of demand. Essentially a black hole of liquidity supercharging capital efficiency.

A new era of Capital Efficiency in DeFi

This push for capital efficiency is reflected in the wider crypto ecosystem as well. Uniswap v3, with its concentrated liquidity positions, is touted as 4000x more capital efficient than its v2 counterpart. Even other DEXs are becoming more cognisant of the importance of capital efficiency, with Osmosis adding superfluid staking for OSMO being used as liquidity for its exchange, so they can both be used to swap and to secure the network.

Hashflow adopts a more extreme approach, completely eliminating the on-chain pricing mechanism. Hashflow uses off-chain pricing to allow market makers to provide real-time quotations to traders, guaranteeing that capital is always distributed properly. The market maker collects the spread if the quotation is filled; if it isn’t, their money is instantly released.

Element Finance is another protocol that improves on capital efficiency of locked in assets by generating two tokens based on the locked asset: the principal and the yield token. A user can now stake these tokens to earn extra yield, sell the principal one and just keep the exposure to the yield or sell his entire position to realise instant profit among other things.

These initiatives are harbingers for a new era where capital efficiency is the focus and not just TVL metrics.

Timeswap aims to complement these wide arranging technological solutions that are moving the overall DeFi ecosystem forward as we build out the financial infrastructure of the future. All of this enabled by a completely permissionless, secure and highly capital efficient AMM. A fully decentralized money market for a more equitable and community driven future of DeFi!

Our Social Media

Website: www.timeswap.io
Twitter: https://twitter.com/TimeswapLabs
Discord: https://discord.gg/timeswap
Telegram: t.me/timeswap
Medium: http://timeswap.medium.com

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