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The Money Market
Consider the following market values as of Oct 6th, 2021:
Total crypto market cap: ~ $2.14 Trillion Out of which BTC: ~ 974 Billion and ETH: ~ 412 Billion
Today the total value locked in DeFi is ~$90.95 Billion (source: Defipulse) out of which ~ $43.82 Billion of assets are locked in lending and borrowing protocols. I.e ~50% of the value locked in DeFi is in lending and borrowing protocols.
The most important takeaways from the above numbers are:
  • Only 3.9% of crypto assets are locked in DeFi today
  • Lending and borrowing is the primary use case within DeFi
A sceptic would point out that a significant portion of the untapped market is due to Bitcoin’s market cap, however, if there is any token that has had an even more astronomic rise than the DeFi market, it has been WBTC.
Today, the total supply of WBTC is ~ 205,870. Whereas the total supply on April 1, 2020, was ~ 1,000.
i.e 197x increase in the supply of WBTC(source: Defipulse) and it is no coincidence that this rise happened along with the explosive growth in DeFi. It would be safe to assume that more and more Bitcoin will port to WBTC in search of better yields.
Considering the above, we believe the total addressable market within Crypto for Timeswap as of today would be ~ $500 Billion.
Not to mention, lending and borrowing today within crypto is highly capital inefficient due to over-collateralization — another significant inefficiency being addressed by Timeswap via our market-driven collateral.
As more and more crypto native businesses bloom, they will have significant free cash flow that can be lent to Timeswap pools to manage their future cash flows with fixed time preference as well as earn yields on them. Traditional asset-backed bonds are a massive market as we explain below.

Global addressable market

Timeswap pools can be considered equivalent to fixed income products in traditional financial markets wherein companies issue secured bonds with fixed time preference for managing their cash flow from operations.
While the size of overall global bond markets is in excess of $100 trillion, we can consider asset-backed bonds as an equivalent of Timeswap pools. Asset-backed bonds account for over $1.8 trillion in value just in the United States according to the Securities Industry and Financial Markets Association(SIFMA). This shows the significant size of traditional bond markets and as more and more companies move to the digital asset industry, we believe there is a significant opportunity for Timeswap to capture this market.
For example, Microstrategy can deposit their significant Bitcoin holdings to Timeswap pools to unlock liquidity which can be further used for their working capital operations or for further Bitcoin purchases such as this.

Timeswap User Cases

Within the crypto economy, users have very little options for fixed time preference financial products today. While we are still very early in the journey of the crypto economy, we believe Timeswap pools will act as a significant growth lever as the industry matures.
We note below some of the potential use cases of Timeswap pools for participants within the crypto economy.
  • High-quality assets: Today a large portion of the assets locked in DeFi is high-quality assets such as BTC and ETH. However, they are still largely capital inefficient due to the arbitrary collateralization values being followed across all assets. With Timeswap pools allowing for market-driven collateral, we believe this will attract a significant portion of the current borrowers given the benefits of no liquidation as well as capital efficiency. Additionally, due to the fixed time preference, lenders can expect to receive higher returns compared to other money markets while at the same time having the flexibility to decide their risk profile based on their assessment of the collateral.
  • Passive capital: Today there is significant passive capital that is locked in various protocols such as Uniswap and Sushiswap. A good indicator of this passive capital is that even after the rewards had ended on Uniswap pools, a significant portion of capital continued to stay on. This can be considered akin to index investors in traditional markets, who are only looking to match the market returns rather than generate significant alpha. While EV maximization might be the stated objective of crypto hedge funds, we believe there is significant capital today that is open to near market returns via deploying capital passively. Timeswap pools will be able to attract a significant portion of this capital due to the better returns as well as the flexibility of deciding your own risk profile.
  • Short Selling: One of the major use cases of borrowing in existing money markets is for short selling assets by traders. Timeswap offers two distinct advantages for this market (i) The no liquidation mechanism where the traders don’t have to worry about liquidation due to adverse price movements before the maturity of pools. Incidents such as the “ySqueeze” that happened to the YFI shorts recently will not happen on Timeswap pools. (ii) Ability to short long tail assets which do not have perpetual or futures markets today
  • Debt Funding for treasury tokens: Projects that have treasury holdings in the form of their own governance tokens can deposit this to Timeswap pools and borrow capital from their own community instead of having to sell their tokens. This signals a commitment from both the team as well as the community on the long term potential of these projects. This allows for better cash flow management for projects as they mature.
  • Long tail assets: Money markets today in Crypto exist only for the high-quality assets, whereas there is a significant amount of long tail assets that can be utilised on Timeswap pools for lending and borrowing. Due to the absence of any other solution, we believe there will be significant demand from this category. While these tokens can be highly volatile, Timeswap pool parameters allow the flexibility for pool creators to decide the risk profile they’re comfortable with for that particular asset. And since each pool is independent there is no system-wide risk with this model and allows for market-driven collateral and greater capital efficiency.
  • Hedging: Timeswap pools can also be used by investors and traders in various projects as means to hedge their underlying exposure without selling the tokens.
There are numerous other use cases that may be very early in terms of ideation, but we believe the permission-less nature of Timeswap pools means there can be interesting use cases such as the following:
  • Timeswap pools can be used to create yield curves for any ERC-20 asset in the market which allows for multiple other financial instruments to be built on top of it.
  • Timeswap pools can have perpetual roll overs built on top of existing pools thereby allowing for continuous time preference as well as the ability to build perpetual financial products on top.
  • Tranching of risk of each pool at the UI layer where users do not have to depend on their market understanding can be helpful for adoption among retail users.
  • Secondary market for the bond tokens that will allow for liquidity to lenders in each pool. This can be structured in the form of zero-coupon bonds or other similar solutions available in traditional markets.
  • NFT collateralized loans is another significant opportunity that we are exploring where any kind of traditional assets such as real estate or art can be used as collateral for borrowing.
  • Given the fixed nature of Timeswap pools, Option markets can also be built on top allowing for more structured financial products such as Credit Default Swaps that have institutional demand.
As we can see from above, Timeswap pools can be considered as an entirely new lego for the DeFi ecosystem where multiple new financial products can be created by using Timeswap pools at the base of it. We expect multiple new DeFi projects to be built on top of Timeswap pools by the community, where Timewap acts as the base layer.
What about Fractional Liquidity
We believe that the protocol is designed in such a way that it will find its equilibrium in terms of sourcing maximum liquidity into the pools where the slippages are minimum. Since fractional liquidity can lead to large slippages for LPs, automatically more and more LPs will converge towards the pools which will be more liquid.
Also, Timeswap’s flexible liquidity system will empower the market to decide how many pools are the optimum pool numbers for each pair. We are also exploring the idea of abstracting away the complexity of having multiple pools maturing close to each other by only allowing certain maturity pools to be created on the UI while still giving the flexibility to interact directly with the contract and create pools that match the time preference of sophisticated market participants.
We also plan to have liquidity mining incentives for pools having the most popular assets such as ETH, WBTC, USDT, USDC, and having maturities that are in line with typical market expiries such as quarterly or half-yearly, or annually. We believe due to the inherent demand for lending and borrowing of long-tail assets, we would not have to provide incentives to bootstrap liquidity. We plan to have liquidity mining incentives that are designed to ensure users are motivated to provide liquidity for longer durations.
Some of the other ideas we are exploring to reduce the fractional liquidity problems are following:
  1. 1.
    Combining pools of various maturity durations to have shared liquidity across pools
  2. 2.
    Provisions and techniques to enable Impermanent loss reduction for LPs
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