Market-Determined Yield Curves are essential infrastructure for financial ecosystems. This is particularly evident at the short-end where instruments like the Repo trade to the tune of $5 trillion in daily volume, and are vital for well-run capital markets. Fundamentally, Yield Curves are requisite for pricing all financial instruments, enhancing liquidity, and enabling efficient resource allocation. Despite their importance, a notable absence of market-determined yield curves is evident within DeFi. Incumbent solutions here rely heavily on the “Utilization Rate Model” instead of a market-determined yield curve, and consequently impose large scale inefficiencies on the system. This model’s limitations are threefold:

  1. Interest rates do not reflect market conditions Rates under incumbent models are mechanically derived and updated manually, typically driven by governance. Implying that interest rates set by these models do not reflect the underlying economic reality.

  2. Economic inefficiency, i.e misallocation of resources .Borrowing and lending markets in DeFi operate far from their equilibrium quantities, able to provide only 50% of the surplus actually owed to borrowers and lenders. Leading to substantial deadweight loss. This is the case for stablecoins like USDT where utilization rates tend to be 80%+. Utilization drops to ~50% for grade A assets like ETH, down to 25% for wst ETH, and even lower for long-tailed . Thus, the deadweight loss is much greater than 50% for most digital assets under the utilization rate regime.

  3. Crippling choices in maturity. One of the biggest advances TradFi made was the introduction of the Repo. Facilitating borrowing and lending across various short-term maturities for 1-day, 2-days, etc. up to a year. The advantages are simple - matching maturities for your own borrow / lend needs reduces funding rates to long positions, and allows for a cheaper method to cover short positions. Such versatility greatly enhances liquidity. DeFi lacks this capability, unable to support both custom maturities and fixed rates, in the absence of a Yield Curve.

Temporal addresses these issues by introducing novel AMM-based, real-time, continuous yield curves to DeFi. The innovation enables fixed rates, custom maturities and market-determined yield curves. Key benefits include:

  1. No Liquidity Fragmentation

  2. Capital Efficiency

  3. And Low Slippage

The mechanism we outline in the following sections is generalizable to creating forward curves as well. Bringing unprecedented functionality to on-chain credit and derivatives markets.

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