Term Finance STEP Application

Applicant information

Name
Term Finance

Address (Headquarters)
Term Foundation, c/o Leeward Management Limited, 3119 9 Forum Lane,
Camana Bay P.O. Box 144

City, State, Postal Code
Grand Cayman KY1-9006

Country
Cayman Islands

Website
term.finance

Primary contact Name
Billy Welch

Title
Contributor

Country
USA

Email, Telegram, Forum, & other methods of contact
email: billy@termfinance.io
telegram: billywelch

Key Information

Expected Yield
9%+

Expected Maturity
1 month term loans entered into on a weekly, reoccurring basis through Term’s auction mechanism.

Underlying asset
Lenders receive ERC-20 tokens, known as Term Repo Tokens, in an amount equal to the repurchase price due to them on the repurchase date. These repo tokens represent a claim against the Term Repo and are normalized to convert 1:1 with the underlying purchase token (typically USDC and ETH) on or after maturity when burned.

The amount of repo tokens received by each lender is a function of the clearing rate and amount of purchase tokens successfully tendered in auction. The exact formula can be found in the Conventions section of the protocol’s docs.

Minimum/Maximum transaction size
$1,000

Current AUM for product
TVL $22m

Current AUM for issuer
N/A

Volume of transactions LTM
$81.45m

Source of first-loss capital
Loans on Term are overcollateralized. In the event, borrowers do not repay their loans and the value of liquidated collateral is insufficient to repay lenders in full, losses are socialized losses across all lenders in a specific isolated lending market.

Basics and background

1. How will this investment improve Arbitrum’s RWA ecosystem?

Term Finance is an EVM DeFi lending primitive that brings scalable fixed-rate, fixed-term lending through an innovative single-price, sealed-bid auction system, specifically designed to address the volatility and inefficiencies in existing cryptocurrency lending markets.Term’s architecture allows the protocol to onboard both permissioned and permissionless RWAs as collateral (see e.g. Matrixport’s permissioned wSTBT auctions).

2. Identify key management personnel and individual experience. Also include third parties utilized for managing assets and their qualifications.

Key contributors to the protocol include the following:

Dion Chu – Dion is co-founder and CEO at Term Labs. Prior to founding Term, was a trader at Capula Investment Management, a global fixed income specialist firm that manages absolute return strategies, primarily for sovereigns, institutions, and financial intermediaries. Before joining Capula, Dion worked as a sell-side trader and market maker in U.S. Treasury securities at Jefferies. Earlier in his career, he held positions with the treasury department of D.E. Shaw and the Division of Monetary Affairs of the Board of Governors of the Federal Reserve. He graduated from Harvard Law School and Cornell University with a B.A. in economics, magna cum laude and is a member in good standing of the State Bar of New York.

Robert Chu – Robert is co-founder and CTO at Term Labs. Before Term Labs, Robert was a kubernetes/cloud/backend engineering contractor specializing in the finance industry. Prior to that, he co-founded a small biotech software company, worked on the Planet Inc. earth imaging satellite platform, and helped build a Big Data/Machine Learning focused distributed database and computing platform focused on scale. He has also built an open-source novel CRDT-based real-time collaborative serverless database with access control. Much earlier in his career/education Robert worked on experimental computer-vision algorithms for robotic arms paired with depth cameras and is a co-author of a AAAI paper (Gambit: A Robust Chess-Playing Robotic System). Robert graduated from the University of Washington with a B.A. in computer science.

Katherine Lomas – Kitty is a Product Designer who leads design efforts at Term Labs and freelances for other Web3 teams including Halaska Studios. Previously at Mycelium, she launched two web3 products: oracle.reputation.link and tracer.finance. With a Software Engineering background from the University of Queensland, Kitty contributes beyond UI/UX, assisting in product management, PR reviews, and supporting the engineering team.

Michael Peng – Michael is co-founder and part-time legal advisor to Term Labs. He has extensive legal experience with crypto and finance. Michael is currently Deputy General Counsel at Eco, a crypto startup that develops the Eco Protocol and Beam Wallet. He was previously Associate General Counsel at S.F. Express, a $30b logistics conglomerate, where he was responsible for legal for 150+ U.S. employees. Prior to that, Michael was co-founder and the general counsel of a $12m AUM asset management company that invested in diverse sectors, including defi assets. Michael began his legal career at Quinn Emanuel and Kobre & Kim, where he handled securities and IP litigation. Michael graduated from Harvard Law School with a J.D., cum laude, and from Dartmouth College with B.A.s in mathematics and economics, magna cum laude. He is a member in good standing of the State Bar of California.

Matthew Walsh – Matt is a full-stack engineer working at Term Labs, predominantly on the front-end projects. Prior to this, he was an engineering lead at a hospitality tech startup building a property management solution for hotels and accommodation units. He graduated from Trinity College Dublin with a BAI in Electronic Engineering.

William Welch II – Billy is co-founder and Head of BD and Partnerships at Term Labs. Billy began his career at Climate Exchange, an exchange for carbon and environmental markets (sold to the Intercontinental Exchange, ICE, in 2010). Billy conducted a management buyout of a subsidiary from ICE that he ultimately folded into the investment banking unit of Aon where he ran a fixed income trading desk. After Aon, Billy was a founding member of the American Financial Exchange (AFX), an exchange for Fed Funds in partnership with Cboe and publisher of the American Interbank Offer Rate (Ameribor). AFX was ultimately sold to 7Ridge in 2023. After AFX, Billy served as COO and CFO of RTRS, a risk management software company providing technology solutions to Marsh, Zurich and other global insurance companies. After RTRS, joined Mycelium, an web3 infrastructure firm where he led the core team providing services to TracerDAO, a perpetual protocol on Arbitrum. He graduated with a Bachelors of Science in Finance from Indiana University’s Kelley School of Business.

Dai Yu – Dai Yu is co-founder and CFO at Term Labs. He was a portfolio manager at GoldenTree Asset Management and an associate at Morgan Stanley and Citibank. He graduated with a bachelor’s in both Finance and Computer Science from the University of Pennsylvania.

Andrew Zhou – Andrew Zhou is co-founder and lead smart contract engineer at Term Labs. He was a Software Development Engineer at Amazon where he supported development of Amazon Managed Blockchain products built on top of Ethereum. Prior to that, Andrew trained and deployed machine learning models at Amazon and was a Software Development Engineer at Siemens building cloud microservices, as well as tools for cloud systems disaster recovery. He graduated with a Bachelor of Arts in Computer Science from University of California, Berkeley.

3. Describe any previous work by the entity or its officers/key contributors similar to that requested. References are encouraged.

Team Experience

  • Traditional Finance (TradFi): Founding team members have held positions at prestigious institutions such as D.E.Shaw, Federal Reserve, Citibank, Morgan Stanley, and GoldenTree.
  • Big Tech: Extensive experience in DeFi (Tracer and Mycelium) and major tech companies including Amazon, Siemens and Planet Inc.
  • Education: Founders have attended top-tier universities, including:
    • Cornell University
    • Harvard Law School
    • Dartmouth College
    • University of Pennsylvania
    • University of California, Berkeley
    • Indiana University, Kelley School of Business

Investors

  • Venture Capital: Backed by well-known VC firms like Electric Capital, Coinbase Ventures, Circle Ventures, Robot Ventures, and Maelstrom (led by Arthur Hayes).
  • Prominent Angel Investors: Supported by a range of influential figures in the cryptocurrency space (over 2mm+ Twitter followers across angel backers)

4. Has your entity or its officers/key contributors been subject to an enforcement action, criminal action, or defaulted on legal or financial obligations? Please describe the circumstances if so.

No.

5. Describe any conflicts of interest for your entity and key personnel.

None.

6. Insurance coverages, guarantees, and backstops Name of insurer or guarantor Per incident coverage Aggregate coverage

Nexus Mutual provides smart contract insurance for the Protocol.

7. Historical tracking error in your proposed product, or similar to that being proposed Product 2024 YTD 2023 2022 2021

N/A

8. Brief reason for above tracking error

N/A

9. Please describe any experience your firm has in working with decentralized organizational structures

The Protocol has strategic partnerships with several onchain projects, including the following:

  • Large upcoming partnerships with on-chain vault strategies managing over $400 million in TVL
  • Partnership with Matrixport to enable fixed-rate lending against permissioned RWAs
  • Partnership with Lido to offer exclusive incentives to lenders on the Protocol
  • Partnership with prominent LRTs (EtherFi) for points integration and bonus points for lenders on the Protocol

10. What is your entity’s current assets under management, assets held in trust, total value locked, or equivalent metric for your legal structuring?

The Protocol’s TVL is $22m and its volume of transactions is $81.45m.

11. How many of these assets held are present on Arbitrum One, if any?

N/A

**Plan design**

1. Please describe your proposed product, including a description of the underlying assets and, if more than one asset, the proposed allocation among assets and general investment guidelines. Where appropriate, include targeted maturity mix and credit quality. Attach supplementary documents as appropriate.

The Protocol enables fixed-rate, fixed-term collateralized loans of cryptoassets, including RWAs for the assets being lent or serving as collateral. The Protocol solves the extreme volatility and rapidly increasing rates in variable rate DeFi markets, which make financing unpredictable and costly for borrowers. Isolated lending pools also enable quick adoption of new collateral types to respond to a rapidly changing market without additional risk to its users.

The Protocol’s innovative characteristics include the following:

  • Single-Price Sealed Bid Auction Instead of AMM: Instead of using an AMM, Term introduces an innovative auction mechanism that matches lenders and borrowers at a single fixed rate, eliminating slippage and spread issues common in other DeFi lending models.
  • Fixed-Rate, Fixed-Term Lending at Scale: Offers stability and scalability in a market known for extreme volatility, enabling both individual and institutional participants to manage and execute financial strategies at scale with predictability.
  • Permissioned RWAs: Term is able to support the onboarding of permissioned RWAs as collateral. Term has successfully completed multiple pilot auctions in partnership with Matrixport and their STBT token.
  • Isolated Collateral Pools: Each loan is backed by its own segregated collateral pool, enhancing protocol security and enabling customized loan terms and rapid onboarding of new collateral types onto the protocol.
  • Capital Efficiency: Unmatched funds are immediately returned to lenders, optimizing capital efficiency and eliminating idle assets.
  • Customizable Loan Features for a Variety of Needs: Supports diverse financial needs rather than imposing a one-size-fits-all approach by allowing customization of loan terms, oracles, and tokens, catering to a wide range of borrowing and lending needs.
  • Dynamic Liquidations: Implements an innovative dynamic / soft liquidation mechanism that limits liquidations to the point that take the borrower back to their initial margin ratio - neither too much nor too little.

2. Do investors have any shareholder, investor, creditor or similar rights?

The Protocol is entirely onchain and transparent. Lenders on the Protocol are protected through a collateral liquidation mechanism, specifically an innovative dynamic / soft mechanism that limits liquidations to the point that take the borrower back to their initial margin ratio—neither too much nor too little.

In addition, each loan is a separate smart contract deployment, which enables isolated collateral pools that reduce the risk of contagion and allows the Protocol to onboard a wider range of collateral types (including RWAs).

3. Describe the legal and contractual structuring for your product including regulatory bodies overseeing your business and the product and identifying all legal jurisdictions interacting with your product. Attach supplementary documents as appropriate.

The Protocol is a decentralized collection of smart contracts deployed on Ethereum mainnet and Avalanche (and is expected to be deployed on additional chains, including Arbitrum).

4. Would Arbitrum’s assets be bankruptcy remote from your own entity and its officers/key contributors? If so, please explain the legal and contractual basis. On a confidential, non-reliance basis, provide any third party legal opinions to support the conclusions.

Yes—the Protocol is noncustodial and neither Term Foundation nor any entity or person other than Protocol users themselves own the assets being lent or serving as collateral.

5. How are Arbitrum’s assets protected vis-a-vis the bankruptcy of the brokerage or applicable financial institution (e.g., bank deposit insurance, securities insurance, etc.)?

Because the Protocol is entirely onchain, Arbitrum’s assets are not exposed to any brokerage or financial institution.

6. Does the Issuer issue more than one asset? If so, what is the priority relationship between different asset classes?

The Protocol is not an issuer. However, as described above, the Protocol supports a wide variety of cryptoassets for lending and collateral (including RWAs). Lenders with a specific collateral pool are pari passu with respect to any haircuts due to bad debt.

7. Provide a detailed cash flow diagram that shows the flow of funds from ARB/Fiat conversion, investment in underlying asset, payment of expenses, sale of underlying asset, and repayment (Fiat/ARB conversion), including the counterparties and legal jurisdictions involved.

  • ARB is converted to a supported cryptoasset (e.g., USDC or a tokenized RWA).
  • The cryptoasset being lent is then used to make loan offers in Protocol auctions or placed in a vault or smart contract that does so.
  • As loans mature, the proceeds are collected and either retained or rolled into new auctions.

The above flow is entirely onchain. The only counterparties are Protocol users borrowing in auctions.

8. Describe anticipated tax consequences (if any) in transacting on the underlying and/or receipt of yield.

The yield received would likely be considered interest received on a loan. Although the Protocol’s interface geoblocks the U.S. and does not permit U.S. users, the tax treatment in the U.S. may be instructive—loan interest is typically taxed as ordinary income at the federal level.

9. Describe the process and expected timeline for liquidation of assets, if given instructions to do so by Arbitrum governance.

Outstanding loans may either be held through maturity or a buyer can be found for the tokens that represent the right to claim loan repayments.

10. What amount of first-loss equity will Sponsor provide to ensure over-collateralization, how is the first-loss equity denominated, and what is the source of capital?

As explained above, the Protocol socializes losses across all lenders in a specific isolated collateral pool on a pari passu basis.

11. Describe the liquidity and stability of the proposed underlying assets, including anticipated settlement times from the sale of the underlying to the repayment of ARB.

As described above, outstanding loans may either be held through maturity or a buyer can be found for the tokens that represent the right to claim loan repayments. Under these circumstances liquidity depends on factors such as length to maturity. Loan terms are typically 4 weeks and 4 week ladders can be constructed to have weekly liquidity.

12. If relying on the blockchain for any of the transactional flows, please describe any blockchain derived risks and mitigations.

The Protocol is entirely onchain and has undergone significant real-use and audit testing:

  • Its smart contracts have undergone multiple security audits with reputable firms like Sigma Prime, Dedaub, and Runtime Verification.
  • It has undergone formal verification using Certora’s prover with thorough protocol coverage (over 200 rules and invariants verified).
  • It has achieved a 93% rating from DefiSafey for access controls, audit process, and overall protocol monitoring procedures.

13. Does the product rely on any derivative product (swaps,OTC agreements?

No.

14. List all the third party counterparties linked to your assets including and not restricted to prime broker if any, custodian, reporting agent, banks for derivatives or loans and provide primary contact details for the third party counterparties

The Protocol is noncustodial and neither Term Foundation nor any entity or person other than Protocol users themselves own the assets being lent or serving as collateral.

15. Can you explain how is risk management (inv and operational) being done? Can you provide a copy of your risk management policy?

The Protocol’s contributors carefully evaluate new cryptoassets being considered. Factors consider for onboarding collateral assets include 1) Reputable Oracles 2) deep onchain liquidity 3) other factors e.g. withdrawal queues also taken into account.

Performance reporting

1. What are your proposed performance benchmarks? If this is substantially different from the underlying assets, please explain why.

Performance should be benchmarked in an asset-specific manner to other lending protocols, such as Aave. Because the Protocol is entirely onchain, performance can be tracked onchain in a transparent manner.

2. Describe the content, format, preparation process, and cadence of performance reports. This should include proof of reserves, if appropriate. Please include a sample report.

The Protocol’s developers would be able to generate performance reports in a manner to be agreed upon.

3. Who provides the performance reports in respect of the underlying assets?

The Protocol’s developers.

4. Describe any formal audit process and timing of such audits.

Because the Protocol is entirely onchain, it does not need to undergo financial audits.

Pricing

1. Provide a copy of your standard contract, or one similar to what is being proposed here.

N/A

2. Fee summary: Inclusive of the full scope of services requested. Product Fee schedule If asset based Fee calculation for our plan if asset based Annual fee if flat fee Any other fees (including redemption or minting fees)

Protocol users are subject to two types of fees: a loan servicing fee and liquidated damages.

  • Servicing Fee: Borrowers are charged a loan servicing fee, typically ranging from 0.25%-0.50% per annum on the amount borrowed through Term. The servicing fee is a fee earned by the protocol for processing loans, maintaining records, and monitoring collateral. The fee is quoted as an annualized rate applied to and deducted from any loan proceeds obtained as a result of a successful bid by a borrower.
  • Protocol Liquidation Fees: Borrowers in default are subject to liquidated damages (a surcharge), which is applied to any debt covered in liquidation and collected in collateral tokens. Liquidated damages are split between liquidators (typically 5.2%) as a liquidation incentive and the Protocol (Protocol liquidated damages, typically set at 2.8%).

3. Describe frequency of fee payment and its position vis-a-vis payment priority compared with other expenses (i.e., cash waterfall)

Servicing fees are paid by the borrower upon disbursement of loan proceeds to a borrower in an auction.

Smart Contract/Architecture

1. How many audits have you had and name of auditors? Please provide a copy of reports.

The Protocol is entirely onchain and has undergone significant real-use and audit testing:

2. Is the project permissioned? If so how are you managing user identities? Any blacklisting/whitelisting features?

The Protocol can operate in both a permissionless and permissioned manner. For example, the Protocol has a partnership with Matrixport to enable fixed-rate lending against permissioned RWAs. In permissioned assets the protocol also onboards whitelisted liquidators to ensure orderly liquidations. User identities are typically managed through the RWA partner/project’s process.

3. Is the product present on several chains? Are there any cross chain interactions?

The Protocol is current available on Ethereum mainnet and Avalanche, with additional chains to be added in the coming months. At the moment there are no cross-chain interactions, but they are being evaluated.

4. Are the RWA tokens being used in any other protocols? Please describe the various components of the ecosystem

The Protocol itself does not have its own RWA tokens. Instead, RWA tokens from other projects can be lent or used as collateral in either a permissioned or permissionless manner.

5. How are trusted roles/admins managed in the system? Which aspects of the solution require trust from users?

The Protocol is entirely onchain and lending operates through smart contracts.

6. Is there any custom logic required for your RWA token? If so please give any details.

The Protocol itself does not have its own RWA tokens. Instead, RWA tokens from other projects can be lent or used as collateral in either a permissioned or permissionless manner.

Supplementary

1. Please attach any further information or documents you feel would help the screening committee or ARB tokenholders make an informed decision.

Protocol docs: docs.term.finance

Developer Docs: developers.term.finance