Fixed-Term Loans vs Open-Ended (Evergreen) Loans

Specific advantage: Pre-defined maturity date and interest rate. This matters for treasury management and structured finance where cash flow certainty is paramount. Protocols like Maple Finance and Goldfinch use this model for institutional capital allocation.

Specific advantage: No price-based margin calls during the loan term. This matters for long-term holders (e.g., VC funds, foundations) who need to borrow against illiquid tokens (like locked vesting schedules) without the volatility risk of an open-ended line.

Specific advantage: No maturity date and dynamic, utilization-based rates. This matters for active traders and delta-neutral strategies on platforms like Aave and Compound, where capital needs are fluid and positions are frequently adjusted.

Specific advantage: Deep, pooled liquidity and native integration with DeFi Lego (e.g., using aTokens/cTokens as collateral elsewhere). This matters for protocols building on top (like yield aggregators or structured products) that require fungible, always-accessible debt positions.

Guaranteed duration: Lenders commit capital for a set period (e.g., 30-90 days). This provides protocols like Maple Finance and Goldfinch with a stable, non-withdrawable capital base for underwriting. This matters for institutional lending pools that need to match asset-liability durations for real-world assets (RWA).

Illiquidity premium: Lenders are compensated for locking capital. Protocols can offer higher yields (e.g., 8-12% on stablecoin pools) compared to similar-risk evergreen pools. This matters for yield-seeking DAO treasuries or sophisticated depositors optimizing for absolute return, not liquidity.

No lock-up: Depositors can withdraw at any time, mimicking the experience of Aave or Compound pools. This drives higher Total Value Locked (TVL) by attracting a broader, more casual capital base. This matters for general-purpose DeFi lending markets where user convenience and composability are paramount.

Dynamic risk management: Protocols can adjust parameters (e.g., LTV ratios, oracle feeds) in real-time without being constrained by fixed-term lender agreements. This matters for volatile crypto-native collateral markets, allowing rapid response to market downturns to protect solvency.

Refinancing cliff: At maturity, lenders may not roll over, forcing the protocol to find new capital or call loans. This creates liquidity risk for borrowers. This is a critical weakness for long-duration RWA projects that cannot easily liquidate physical assets.

Hot money: Deposits are flighty, leading to volatile supply and unstable borrowing rates. A sudden TVL drop can force rapid deleveraging. This is a major drawback for businesses seeking stable financing costs, as seen during periods of market stress in general lending pools.

Guanteed loan duration: Lenders commit capital for a set period (e.g., 30-90 days on Aave V2, Notional). This provides certainty for treasury management and structured yield strategies. Protocols like Maple Finance use this for underwritten institutional pools.

No premature withdrawal risk: Lenders cannot exit before maturity, protecting borrowers from sudden liquidity crunches. This is critical for long-tail asset lending or protocols using loans as collateral in other systems (e.g., Gearbox leverage).

Opportunity cost lock-in: Lenders miss market rate spikes. Borrowers face refinancing risk at maturity, which can be exploitable (e.g., 'loan expiry attacks'). Requires active rollover management, increasing operational overhead.

Idle capital between terms: Funds are not continuously deployed. For borrowers, over-collateralization ratios are typically static and higher (e.g., 150%+ on Notional) compared to dynamic systems, tying up more capital.

Continuous liquidity utilization: Protocols like Aave V3 and Compound use dynamic interest rates and LTVs to keep pools fully utilized. Enables features like "eMode" for correlated assets, boosting borrowing power up to 97% LTV.

Instant entry/exit: Enables flash loan integration and seamless use as collateral in DeFi Lego (e.g., depositing aUSDC into Convex). This is the backbone of yield farming strategies and recursive lending on Ethereum and L2s.

Bank run vulnerability: Sudden mass withdrawals can trigger liquidity crises and rate spikes, as seen during market stress events. Requires sophisticated risk modules and emergency pauses (e.g., Aave's Guardian) to manage.

Unpredictable borrowing costs: Interest rates algorithmically adjust with utilization, making long-term project budgeting difficult. Lenders face APY compression during low-demand periods, reducing predictable yield.