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CryptoEconomic Research

Timeswap: A Permissionless, Oracle-less and Non-liquidable Lending Protocol

Timeswap enables lending and borrowing of tokens using market-driven interest rates and collateral factors in a self-sufficient and decentralized manner.
by James ChungNovember 2, 2022


Despite the bear market, decentralized finance (DeFi) accounts for over $50B in capital (over $170B at its peak about a year ago). This is tremendous growth, considering DeFi was worth less than $1B three years ago. With only 8% of capital locked in lending protocols (a primary use case within DeFi) at its peak, the current market serves as an opportune time for builders to address some of the capital and structural inefficiencies experienced today by the community. Inspired by Uniswap, Timeswap has created a unique 3-variable constant product automated market maker (AMM) and an oracle-less design to address potential attack vectors while still being scalable. Such structural improvements in financial primitives will continue to set the protocol apart from its peers by preserving efficient markets and preventing potential oracle exploits in the future.


Timeswap is a unique 3-variable AMM to facilitate lending and borrowing transactions in a self-sufficient, non-custodial, gas efficient and permissionless manner. As a result, anyone can lend or borrow an ERC20 token with any maturity date by creating a pool with another ERC20 token as collateral. 

Launched on Polygon, Timeswap 3-variable AMM represents the principal pool (X), interest rate pool (Y) and the collateral factor pool (Z). As a constant product formula (K), when any of the variables change, the other two variables will also change dynamically to maintain equilibrium.  

Shown below, the principal pool (X) represents the assets that can be borrowed, interest rate pool (Y) determines the maximum interest rate per second of the pool and the collateral factor pool (Z) determines the minimum collateral debt position required to be locked up by borrowers. 

Additionally, there is also the asset pool and the collateral pool as illustrated below. The asset pool accounts for the amount of ERC20 asset tokens locked in the pool resulting from assets lent by lenders and debt paid by borrowers, while the collateral pool is the amount of collateral tokens locked in the pool by borrowers.

When assets are deposited to the principal pool (X), both interest rate pool (Y) and collateral factor pool (Z) will need to decrease for the next lender. This will continue as long as assets are added to the principal pool (X). Inversely, when a borrower withdraws assets from the principal pool (X), both interest rate pool (Y) and collateral factor pool (Z) will increase. 

The protocol is oracle-less, which means that it does not depend on an oracle to fetch real-time rates for the assets being put into the pools. Therefore, it  primarily relies on arbitrageurs to maintain the interest rates and collateral debt positions when price dispersions occur. Arbitrageurs may also monitor for imbalances across various markets and other DeFi protocols to benefit from such price dispersions, allowing for a more capital efficient ecosystem. As a result of the constant product formula (K), lenders and borrowers will also have the flexibility to change the variables based on their interest rate and collateral risk appetite. As an example, for borrowers wishing to borrow assets at a lower rate, it will require a higher amount of locked collateral whereas for lenders wishing to lend assets at a lower rate, it will result in a higher amount of insurance issued. Such flexibility will further enable the respective pool for real-time market price discovery of these factors.

In order to account for every transaction conducted on Timeswap, the protocol relies on its suite of six native tokens that represent the bond principal, bond interest, insurance principal, insurance interest, liquidity and the collateral debt position. Below is an example for a DAI/ETH liquidity pool and the interactions of the six native tokens with the pool.

Brief descriptions of the six native tokens:

Bond principal token (BPT): issued to lenders to account for the principal owed upon maturity

Bond interest token (BIT): issued to lenders to account for interest receivable upon maturity

Insurance principal token (IPT): issued to lenders to hedge against the default risk of borrowers

Insurance interest token (IIT): issued to lenders to hedge against the default risk of borrowers

Liquidity token (LT): issued to liquidity providers of the pool who add assets and collateral

Collateral debt token (CDT): issued to borrowers who deposit collateral and borrow assets

Unfortunately at the moment, lenders can only claim their assets after maturity and may only exit their position before maturity by selling positions in secondary markets such as Opensea.  When lenders claim assets after maturity, the bond tokens and insurance tokens are burned as the lent asset is returned along with interest to the lender. From a borrower’s perspective, they must pay back the debt before maturity to withdraw their collateral stake or forfeit it to their respective lenders. In an unfortunate scenario where a default occurs, the insurance token plays an important role and would allow lenders to have a proportional claim to the underlying collateral staked by borrowers. Below is an example where we see that if one were to default on the loan, the lender would receive ~742 MATIC in compensation.

Lastly, Timeswap’s AMM also addresses the risk of impermanent loss for liquidity providers on their yield and insurance values that is typically seen in a constant product design.  Impermanent loss typically occurs when the price of tokens inside a constant product AMM diverge in any direction, with greater divergence resulting in greater impermanent loss.  However, Timeswap’s AMM eliminates such losses by using an algorithm where the parameters for debt, yield, collateral and insurance adjusts with time making the parameters time-invariant or unaffected by the passage of time  

Tokenomics and Mechanism Design

Timeswap is in the process of introducing its own native TIME token to help facilitate the governance of the protocol through its community members. The token will help facilitate participation in the decentralized network which may be acquired by users to also play the role of liquidity providers through a liquidity mining event. The native token may also be distributed to users as incentives for contribution and maintenance of the network. Although the TIME token will initially have limited functionality, various features are expected to be implemented overtime as the development of the protocol progresses further. 

Macro View

As the DeFi ecosystem continues to grow and mature, structural and capital inefficiencies will be resolved overtime as protocols such as Timeswap bring real solutions and new financial primitives to the ecosystem. Most lending platforms today only allow for stablecoins as collateral, therefore enabling long tail assets as collateral will greatly improve liquidity and capital efficiency as assets are pooled together in a single pool. The DeFi ecosystem also continues to experience liquidations and oracle manipulation attacks with the most recent being a $100M+ Mango exploit on Solana. Liquidation and oracle-based money markets will continue to be vulnerable, therefore protocols that are oracle-less, permission-less and AMM backed, such as Timeswap, may prove to be the leading and self-sustaining money market model.  

Since launching on mainnet in March 2022 of this year, Timeswap has witnessed high demand as lending and borrowing volume both reached ~$1M across 37K transactions and 6K unique users. Timeswap also plans a V2 launch of their protocol and will introduce new features that will further scale capital efficiency of the protocol. Such features will allow lenders and liquidity providers to exit before maturity and the ability of re-paid assets by borrowers before maturity to be lent out to future borrowers. As one of the protocols that continue to build in turbulent times, Timeswap will be worth monitoring as it progresses in building a permissionless and decentralized financial infrastructure for everyone in the world.

Further Reading and Sources

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