Today, we are pleased to announce an overview of the key features of Notional V2. Notional V2 is a sophisticated protocol, and this blog post avoids technical detail. For readers who are interested in understanding how we achieve the properties described here, stay tuned for in-depth updates to come between now and our targeted Ethereum Mainnet launch date of September 15th.
Notional V1 introduced fixed rate lending to DeFi in January 2021 and saw early success, attracting over $20M in TVL and processing over $12M in loans. Notional V2 builds on this success and introduces essential upgrades that will help DeFi match the capabilities of the traditional financial system. The upgrades to the Notional protocol detailed here will empower users to plan for the long-term and enable us to deliver stability to global crypto markets with transparent, fixed rate lending and borrowing on Ethereum.
Notional V2 introduces three core features:
- Longer-dated maturities for lenders and borrowers. At launch, users will be able to fix their interest rates for up to one year. Soon after launch, Notional will extend the maturity horizon and enable users to fix their interest rates for up to two years, five years, 10 years, and even 20 years.
- Flexible dates for lenders and borrowers. Notional V2 puts the infrastructure in place for users to lend and borrow to dates that don’t match the maturity of an active liquidity pool. Notional’s innovative collateralization system lays the groundwork for users to exercise more choice regarding the maturity date of their loans without fracturing liquidity across a large number of liquidity pools.
- High-yielding, fully-passive liquidity provider experience. Notional V2 boosts LP returns by integrating with Compound and enables passive liquidity provision with nTokens. nTokens are auto-rolling ERC20 liquidity tokens that provide liquidity across all active liquidity pools in a given currency type at the same time. nTokens replace the high-touch LP experience of Notional V1 with an experience that requires no engagement from the user.
Together, these features provide users flexible access to long-term fixed rate financing and ensure that liquidity providers are attractively compensated for the critical role they play in the system.
The ability to borrow and lend at fixed rates of interest for years at a time will change DeFi as we know it. Today, DeFi lending markets can only cater to users who are focused on the short-term. With Notional V2, DeFi users will be able to lock in interest rates that last years, not days.
- Crypto companies and DAOs can borrow against their treasuries and put the cash to work with the knowledge that their borrowing costs won’t spike in the process.
- Lenders can lock in dependable earnings and plan for their futures knowing that their income is fixed.
- Traders can borrow against their crypto and pursue stable-return strategies with the certainty that rising borrowing costs won’t destroy their profit margins.
The ability to plan for the future with fixed rate lending enables users to minimize their risk, make better decisions, and focus on the longer-term.
Idiosyncratic fCash is an fCash token whose maturity does not correspond to an active liquidity pool. Users of Notional V2 can mint, transfer and even use idiosyncratic fCash as collateral to borrow against. The flexibility to borrow and lend to customized dates greatly expands the utility of fixed rate borrowing and lending. Here are two examples of users who might want to lend or borrow idiosyncratic and why:
- A business that owes a fixed payment at a future date could lend their cash to that specific date so they can match off their future obligation exactly while optimizing their earnings between now and then.
- A trader who is arbitraging Notional interest rates against fixed interest rates available on another venue could lock in their profit by matching their fCash maturity to the maturity date on their loan at the other venue.
Idiosyncratic fCash is an important part of Notional’s long-term vision. Liquid idiosyncratic fCash markets allow users to lend and borrow to the dates that work for them, not just to dates that match on-chain liquidity pools. Liquid markets for idiosyncratic fCash will require active participation from market-makers, and this will take time to develop. But Notional V2 puts the core infrastructure in place that will enable these markets to flourish as Notional grows and the community of users becomes more engaged.
Notional <> Compound LP Integration
In Notional V2, liquidity providers deposit cTokens (ex. cDai) into Notional’s liquidity pools instead of the underlying token (ex. Dai). This allows LPs to earn the cToken lending rate on their capital in addition to interest earned lending out their capital on Notional and liquidity fees accruing to Notional’s liquidity pools.
nTokens are ERC20 assets that represent a share of Notional’s total liquidity for a given currency. nTokens enable users to passively provide liquidity to all active liquidity pools in a given currency at the same time without needing to interact with the underlying liquidity pools in any way.
Users who want to provide liquidity to Notional mint nTokens by depositing their cTokens into the nToken account. The nToken account then distributes their liquidity to the active liquidity pools in that currency.
nTokens provide a simple user experience for LPs by handling all the complex interactions with Notional’s underlying liquidity pools and delivering users a standard ERC20 token that behaves similarly to cTokens or aTokens. Liquidity providers no longer need to remember to roll their liquidity upon the expiration of a liquidity pool for example — the nToken account rolls liquidity automatically. Because nTokens never mature, they comply with expected ERC20 token behavior. This means they can be easily integrated into other DeFi protocols such as yield aggregators or as collateral on other lending protocols.
nToken returns improve upon cToken returns by combining the cToken lending rate with Notional’s lending rates and liquidity fees. nToken holders earn returns via their claim on the interest-bearing assets in the nToken account. nToken holders earn interest from the nToken account’s cToken and fCash holdings in addition to the liquidity fees that accrue to the nToken account’s liquidity token holdings.
At any time, nToken holders can claim the interest they’ve earned by redeeming their nTokens for a proportional share of the total value in the nToken account. The combination of cToken interest, fCash interest, and liquidity fees should result in attractive and consistent returns for nToken holders.
Notional V2 will launch in September 2021 pending an audit by ABDK and formal verification by Certora. In the coming weeks, we will publish full documentation and launch to Testnet. This will allow interested users and integration partners to dig into detail on the protocol, ask the Notional team questions, and get an advanced look at the Notional V2 UI ahead of using the protocol at Mainnet launch.
The Notional Team