A couple of weeks ago we saw Timeswap go live on Polygon mainnet for the first time, and just as Uniswap revolutionized the way we swap between tokens, Timeswap has revolutionized the way we lend and borrow our tokens — using their own constant product formula to create a truly permission-less, oracle-less, and decentralized platform.
Timeswap is one of the DeFi projects I’m most bullish on right now, so it would be a shame if I didn’t talk about them.
In this article I’ll go over everything you need to know about Timeswap so you can start using the platform for yourself, and hopefully earn some $TIME tokens via airdrop as soon as the token officially drops.
The original whitepaper for the project was written in February 2021 by the three co-founders: Ricsson Ngo, Harshita Singh, and Ameeth Devadas.
In this paper, the team described the idea for the first decentralized AMM based money market protocol, Timeswap.
In short, Timeswap is a lending and borrowing platform where any user can create their own money market pools. Setting their own maturity times, and using any ERC-20 token pair they choose.
Users can then lend or borrow from these various pools according to interest and collateral rates that are determined automatically by the three variable constant product formula.
Since this formula is what makes the platform so revolutionary, let’s take a look at that first.
Timeswap’s three variable formula was inspired by Uniswap’s own constant product formula, so let’s start there.
As most of us already know by now, Uniswap is an AMM decentralized exchange that allows users to swap between tokens.
An AMM exchange is a lot different then a traditional order book exchange that we’re used to interacting with in traditional finance. Order book exchanges use order books to represent liquidity and determine prices. They also require intermediary infrastructure to match orders between buyers and sellers.
Vitalik first introduced the idea of an AMM exchange in one of his reddit posts from 2017. Uniswap then popularized this model by building the AMM decentralized exchange we know and love today, relying on that constant product formula to give users correct prices.
AMM’s allow for the permissionless trading of assets by using liquidity pools rather than order books. Users provide liquidity, and prices are determined based on a certain mathematical formula. For Uniswap this formula is their constant product formula: x*y=k. I won’t go over this here, but if you’re interested you can read more about it in this Uniswap docs page.
Some advantages for AMM’s include: decentralization, security, token accessibility, non custodial, and no manipulation.
Inspired by Uniswap, Timeswap uses a three variable constant product formula: xyz=k.
- X: principal pool — a virtual pool equal to the amount of assets that can be borrowed - sum of lenders assets
- Y: Interest rate pool — a virtual pool that determines the interest amount per second of the pool
- Z: Collateral factor pool — determines the collateral to be locked by borrowers
“Asset Pool” and “Collateral Locked Pool” are also displayed in the image above. Asset Pool represents the assets deposited by lenders, and assets paid back by borrowers. While the Collateral Locked Pool represents the collateral assets locked up by the borrower.
Using this xyz=k formula, Timeswap determines both collateral and interest rates automatically, based on the proportion of reserves in a pool.
Looking at the image below, we need the formula (see-saw) to be balanced. So when more assets are deposited by lenders into a given pool, colateral and interest rates drop.
Again looking at the image below, when more assets are being borrowed, collateral and interest rates rise to keep the formula constant (keeping the see-saw balanced).
Utilizing this constant product formula gets rid of the need for oracles.
Oracles are third party data feed services that bring off-chain data onto a blockchain or provide on-chain data to other applications.
This quote from one of Timeswap’s article post says it best: “the current money market design in DeFi that relies on Oracles are inherently not scalable to long tail assets due to the low liquidity and susceptibility to price manipulation.”
Today money markets use oracles to determine both interest rates, and fair market value of collateral. Oracles can lead to price manipulation, especially for tokens with very low liquidity, which is why the big platforms we’re used to today only accept high quality assets.
So just as Uniswap is used to swap between those long tail assets all you degens love, Timeswap can be used to lend and borrow between those long tail assets as well.
A truly permissionless platform where you can create a market for any (ANY) ERC-20 assets. Again, this is made possible thanks to the three variable constant product formula Timeswap has come up with.
There are three key issues Timeswap is solving:
- Full Decentralization: As we’ve come to find out, most money markets are not fully decentralized — market creation requires you to go through a governance voting system. “This restricts liquidity for long tail assets wherein projects are dependent on the money market token holders who decide which token can be used as a collateral.”
- Capital Inefficiency: Tokens with different tisk profiles have similar collateralization ratios. This is because it would require even more governance overhead to decide which assets should be allowed as collateral for each token you can lend out.
- Oracle Dependency: Price oracles feed the liquidation engines in money market protocols, which has led to millions drained from the DeFi ecosystem thanks to price manipulation. These oracles are holding platforms back from scaling outside of the top assets.
Features of Timeswap include:
- Market Driven Interest and Collateral Rates: Using their constant product formula: xyz=k
- Oracle-less: Oracles aren’t needed because of the rationality of, if at close to maturity date of the loan the value of collateral is greater than the value of a given loan, then the protocol can expect the borrower to pay back the loan on time. However if the value of collateral is less then the loan, then the protocol can expect a default on the loan, which leads to a liquidation event.
- Permission-less: Anyone can create a money market for any token they choose. No more having to go through a governance system!
- Fixed maturity: This can enable the creation of fixed maturity products, like options or bonds.
- Isolated Markets: This means that the collapse of one collateral asset, won’t effect the other markets.
Some use cases of the protocol include:
- Initial Debt Financing Offerings (IDFO): Instead of an ICO or other traditional methods, projects could opt for an IDFO to make the token launch fair, while still gaining funding. As described in this article written by the Timeswap team: “With Timeswap, project treasuries can now elect to conduct an IDFO instead of selling chunks of the treasury itself. Pairing the project token with a stablecoin and enabling lending on such a market allows the project to have a revenue stream to build out its product. Borrowers get early exposure to a new project without many of the downsides of buying the token itself and liquidity providers gain a new market to earn fees from.” Check out the article I linked to above to learn more about this.
- Reputation based financing: Someone could create a social credit score system using some type of ERC-20 token that assigns value to the reputation of an individual, group or organization. This token will be able to be used as collateral to borrow other assets on Timeswap.
- Using NFT’s as collateral to borrow assets: One can fractionalize their valuable ERC-721 NFT into ERC-20 tokens, and use these as collateral on Timeswap to borrow other assets.
- Liquidity Financing: You can even use LP tokens from other defi platforms as collateral.
There are three main users of the platform:
- Lenders: Lenders use the protocol for fixed yields on the tokens they lend. After maturity of the loan they can claim their principal amount lent, along with any accrued interest. If the borrower defaults, their collateral goes to the lenders.
- Borrowers: Borrowers interact with the same pool as lenders. They lock token B as collateral in order to borrow token A. Before maturity date they pay back the principal along with any interest on token A to withdraw back their collateral. If they don’t pay back the loan before maturity date, the collateral goes to the lender. Users may want to borrow tokens for present usage, leverage, to short, or for futures.
- LP’s: LP’s initialize the pools and add liquidity to them. They can be thought of as both the lender & borrower– “they lend token A so that there is liquidity for borrowers, and lock token B as collateral with token A as debt, to back future claims for lenders to receive” — LP’s are the market makers of the pool. They create markets for both lending and borrowing transactions. LP’s receive a transaction fee reward as an incentive to create these markets.
Lenders & Borrowers:
Timeswap utilizes its constant product formula to automatically calculate interest (APR) and collateral rates (CDP).
Lenders receive this APR rate as a reward for lending out their tokens, which is paid out by the borrowers who pay a certain percent APR to borrow assets.
Borrowers have to lock up collateral to borrow assets. This collateral acts as insurance for the lenders, incase the borrower were to default on their loan.
Lenders and borrowers interact with the same pools, and the interface for both are very similar.
As a lender, you’ll see something like this:
Here you can choose your asset, collateral that you want backing your loan, the maturity date, the amount of tokens you want to lend out, and your risk tolerance.
One of the great things about Timeswap is that you can adjust the APR based on your own level of risk tolerance.
You’ll see a bar like this:
By toggling to “Advanced” on the platform, you can adjust the APR rate to your liking. You just slide a bar from left to right depending on the amount of risk you want to take on. The higher the APR, the less insurance for the lender.
As a borrower you’ll see a very identical screen, which looks something like this:
Here you do the same thing essentially. Choose the asset you want to borrow, the collateral token you want to lock up, maturity date, amount of tokens you wish to borrow, and adjust the APR to your liking. Either keeping the “Recommended” setting, or adjusting it, as mentioned earlier.
This was just a very quick explanation, but to learn more about how to get started with the platform today, you can check out this in depth article written by the Timeswap team.
Keep in mind that right now Timeswap is still in its very early stages of launch, which means that to be safe, they’ve only set up one pool for us to interact with: the USDC-MATIC pool.
Let me start by saying that the tokens I’ll be referring to in this section are completely different from the $TIME token that the platform will be releasing later this year. I’ll talk more about the $TIME token down below, but right now let’s focus on the six tokens that get distributed once a transaction is made on Timeswap.
Looking at the image above we can see the six different tokens listed: Bond Principle Token, Bond Interest Token, Insurance Principal Token, Insurance Interest Token, Liquidity Token, and Collateralized Debt Token.
We can see that four of these tokens go to the lender, one goes to the borrower, and one goes to the LP.
I’ll go over them briefly here, but if you want to dive in further on the subject you can check out this article.
- Bond Principal Token (BPT): This token is issued to lenders who deposit assets into a pool. After maturity date for a loan position, you can swap these BPT tokens and claim back the underlying asset the you lent out.
- Bond Interest Token (BIT): This token keeps track of the amount of interest owed. The owner of these BITs can burn these tokens after maturity to receive the interest due, according to the amount of BIT’s owned.
- Insurance Principal Token (IPT): This token acts as a hedge incase of a borrower default. So if a borrower defaults, I can burn these to claim whatever percentage of funds I’m owed.
- Insurance Interest Token (IIT): This token is also issued to lenders as a hedge against the default risk of borrowers. These tokens act as a hedge for any BIT tokens the lender was not able to receive.
Lenders can trade their positions before maturity if they wish to exit, either in full or partially since they’re ERC-20’s.
- Collateral Debt Position Token (ERC-721-NFT): This token is issued to users who deposit collateral and borrow from the pool. Whenever someone borrows assets from Timeswap, they’ll receive an NFT representation of that position. This CDT acts as a receipt for the amount of funds the user owes. In order to claim back your collateral, you have to pay back the loan before maturity, then you can burn this NFT to withdraw back your collateral.
Borrowers can downsell their loans since they’re NFT’s. Meaning you can sell your borrow positions.
The NFT will look something like this, depending on your exact position of course:
- Liquidity Token (LT’s): If you’ve ever provided liquidity to a DeFi protocol, then you’re probably already familiar with LP tokens. Liquidity providers receive ERC-20 LTs as proof of their asset and collateral deposits into a pool in exchange for transaction fee rewards. “After maturity, these LTs provide a proportional claim over all the assets in the principal pool & collateral locked pool after the settlement process for lenders is accounted for.”
LP’s can also trade their positions, since they’re erc-20’s. Allowing them to exit a position before maturity.
In Timeswap there can be multiple pools for the same token pair, each pool having a different maturity date.
According to The Defiant: “A social token represents a fractionalized share in the intrinsic value of a community, brand, or human. It’s a form of the ownership economy giving participants exposure to the growth trajectory of whatever the community is clustered around as well as the potential to help shape that trajectory.” In other words, the community grows and shares in the benfits together.
There are three main types of social tokens:
- Community Tokens
- Creator Tokens
- Personal Tokens
With Timeswap, anyone holding a social token can create a lending pool for it, enabling these tokens to be used for yield by lending them out, or as collateral to borrow other assets.
If you want to learn more about social tokens and how they can be used in Timeswap, you can check this article out.
Timeswap has only been live on mainnet for a couple of weeks now (since late March), and so far we’ve seen about:
- Over 282,000 USDC lent out
- Over 300,000 USDC borrowed
- Over 10,000 transactions
- Over 3,000 unique wallets
You can check these numbers for yourself here.
As we can see on their website, Timeswap has some big name backers and advisors:
Some of the biggest VC’s in the game, along with Polygon co-founders Sandeep Nailwal, and Jaynti Kanani acting as advisors for the platform.
I should also mention that the third Polygon co-founder, Mihailo Bjelic is an angel investor to the platform.
$TIME will be the native token for the Timeswap platform. The token is not out yet so don’t be fooled! It should be releasing at some point this year, so airdrop opportunity for early users maybe?
In terms of utility, it will be used for governance over things such as: protocol/LP fees, strategic partnerships, future products, and the DAO treasury.
Timeswap is without a doubt revolutionizing the lending and borrowing market.
They’re creating a true permission-less platform where any user, holding any ERC-20 token can create their own money market pool. This means we’re finally getting a reliable lending and borrowing platform for those long tail assets us degens are used to owning. No more having to go through governance voting to get assets approved!
There’s still a lot more I didn’t time to mention. For example they recently awarded early users of their gamified testnet with airdropped NFT’s, that will most likely hold certain unique utility within the protcool in the future. I’d imagine them being used as collateral maybe? These NFT’s are more fun, and look something like this:
Timeswap is definitely one of the DeFi projects I’m most bullish on right now, and being such a young platform still, I’m excited to see how far they go over time.