Notional Finance is a decentralized lending and borrowing protocol operating on the Ethereum blockchain. The Notional crypto ecosystem uses a novel protocol to provide borderless and permissionless fixed-term loans and fixed-term interest rates. The project operates using the unique fCash mechanism in conjunction with the native Notional Finance token (NOTE). Plus, holders of the NOTE token can vote on proposals to change the platform’s parameters.
In this article, we are going to dive deep into the Notional crypto ecosystem. We will explore how the Notional Finance application operates and the function of the NOTE token. Moreover, we’ll explore the Notional crypto automated market maker (AMM) and how to earn a passive income as a liquidity provider.
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What is Notional Finance?
Notional Finance offers fixed-term fixed-rate borrowing and lending facilities of popular cryptocurrency assets. The project was launched during Q1 2020 by experts across various industries, including design, technology, and trading. Bringing familiar opportunities for traditional financial instruments on-chain, Notional is the only decentralized application (dApp) of its kind on the leading decentralized finance (DeFi) blockchain, Ethereum.
While a few other dApps offer fixed-rate financial tools, they are limited and often include variable interest rates during bearish market behavior. Conversely, the Notional crypto ecosystem is the only dApp to offer fixed-rate borrowing and lending facilities consistently. Moreover, operating on the second-largest blockchain, Notional Finance prides itself on facilitating true decentralization.
Notional Finance is introducing an innovative on-chain financial tool, fCash. This enables computer science, cryptography, and smart contracts to automate the borrowing and lending process securely. Furthermore, the Notional crypto ecosystem native asset is the ERC-20 Notional Finance token (NOTE), allowing holders to govern specific platform parameters.
NOTE Token
The Notional Finance (NOTE) token uses the ERC-20 token standard. As such, the NOTE token is compatible with many popular Ethereum DeFi protocols, wallets, and exchanges. However, at the time of writing, the NOTE token is only available to trade on the Balancer v2 exchange.
The primary use case of the Notional Finance token (NOTE) is as a governing mechanism of the platform. Following the initial launch, the Notional Finance team “will provide analysis and parameter recommendations”. However, as the project develops and gains adoption, the team will take a step back. In turn, this will allow NOTE token holders to suggest, vote upon, and implement changes within the Notional crypto ecosystem. Each single NOTE token is representative of one vote. Ergo, the more NOTE tokens one holds, the more influence they can have in a vote.
There is quite an extensive list of Notional Finance token (NOTE) holder governance responsibilities. Notwithstanding, NOTE token holders will have full governing capabilities over setting liquidity fees and collateralization and risk parameters. Additionally, holders of the NOTE token are responsible for “activating new maturities for lending and borrowing different assets” alongside “managing the Notional on-chain treasury”.
Holders of the Notional Finance token (NOTE) can choose to delegate their vote to another wallet address if preferred. There is a minimum threshold of NOTE tokens a wallet must contain to be able to put forward a proposal. Then, the proposal is reviewed prior to a three-day voting period. Following this, with a minimum of four million votes and a majority favor, the proposal will pass through to the Timelock for two days. The proposal can be implemented following the completion of this process.
How Does Notional Finance Work?
The Notional crypto ecosystem uses novel financial tools to offer everyone borderless and permissionless borrowing and lending facilities. As a distributed and decentralized global service, anyone anywhere can benefit from stable, reliable fixed-rate interest with fixed-term borrowing. Notional Finance achieves this with the introduction of fCash, which we discuss further on.
Moreover, there are three key actors within the Notional crypto ecosystem. These are the borrowers, lenders, and liquidity providers. In short, lenders deposit their cTokens (Compound tokens) into a liquidity pool and receive fCash in return. Conversely, borrowers deposit fCash into the pool to loan cTokens. Liquidity providers supply both cTokens and fCash tokens to the pool and earn a passive income with rewards and transaction fees.
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fCash
As the core feature within the Notional crypto ecosystem, fCash provides a reliable and secure way to tokenize future payments. As a result, users can flexibly trade popular cryptocurrencies, with public immutable management of which wallets owe what and at which time. fCash is a mechanism representative of a deposit of funds plus a fixed-rate interest amount and mutually-agreed repayment date. An example for the Notional website explains:
“Two users can enter into an agreement where a lender gives 100 USDC to a borrower who promises to repay 105 USDC [at a future date]. fCash is how Notional defines that future payment of 105 USDC from the borrower to the lender.”
fCash can either be an obligation or an asset. In the given example, the lender receives 105 fCash that is transferable for 105 USDC upon the maturity date. The borrower receives -105 fCash as the obligation for the payment of 105 USDC by the maturity date. As such, the difference in value between USDC and fUSDC available at the set maturity date is the interest rate available.
Borrowing
Borrowers on Notional Finance can receive fixed-term interest rates on their loans. Firstly, borrowers must deposit funds as collateral. Then, available only through the Notional crypto platform, borrowers mint fCash tokens. The fCash tokens are representative of the funds borrowed in addition to a chosen maturity date when the repayment is due. At this stage, borrowers can trade and exchange their fCash tokens for cryptocurrency. Now, borrowers have a loan in the desired currency alongside an obligation for repayment with interest at a future date. Borrowers can choose to repay their loan upon reaching the maturity date or roll on their contract to a future maturity date.
Lending
Users who wish to earn interest on spare capital can become lenders on the Notional crypto platform. As such, lenders will purchase fCash assets that yield a higher valuation than their initial deposit at a future date. The fCash “matures” over time and becomes redeemable for currency upon reaching full maturity. The exchange rate or difference in value between the deposited amount and the fCash asset upon maturity represents the interest earned.
Collateralization
Notional Finance uses a collateralization mechanism to ensure that lenders receive their investment back with interest on time. Moreover, the project only offers over-collateralized loans to borrowers. Notional accepts multiple types of crypto collateral, with collateralization levels differing depending upon the asset. For example, a more stable collateral asset such as DAI requires a minimum of 120% collateralization level. On the other hand, more volatile assets such as Bitcoin (BTC) or Ethereum (ETH) require a higher level of 150%.
Liquidation
Liquidations occur when smart contracts sell assets to cover debt positions. In turn, this means that borrowers cannot simply take out a loan and never repay it. Further, instead of liquidating the entire collateral like a bank would repossess a house, Notional Finance only partially liquidates collateral. This means borrowers won’t lose all their collateral, only enough to maintain the collateralization level for the loan. In the unlikely event of extreme market turbulence and borrower liquidations not occurring quickly enough, Notional has its own reserve pool of native NOTE tokens. The project will sell its assets to raise the capital needed to ensure lenders always receive their funds with interest.
Liquidity Pools
The liquidity pools provide the source of liquidity for lenders and borrowers of the Notional crypto platform to transact with. Instead of expensive traditional third-party intermediaries and banks offering shaded borrowing and lending facilities, Notional Finance offers secure, cryptographic public blockchain management of funds. Further, the liquidity is fully decentralized. Each liquidity pool holds cryptocurrency on one side and fCash on the other. Moreover, each liquidity pool is representative of a maturity date. For example, “a Dec 1 2021, liquidity pool holds Dec 1 2021 fCash”.
Users wishing to become liquidity providers must first choose a liquidity pool and specify the deposit amount. Then, users must mint a pair of fCash tokens with their chosen asset. Next, liquidity providers deposit both cTokens (Compound Tokens) and fCash into a chosen pool (e.g., cDai and fDai). Liquidity providers can then capitalize on their contribution earning a passive income from fees each time a borrower or lender uses the said pool.
nTokens
Another way users can support the Notional crypto ecosystem is by providing liquidity using nTokens. Using the same ERC-20 standard as the native Notional Finance token (NOTE), nTokens represent a borrowing and lending asset. For example, nUSDC, nETH, or nDAI. They are each redeemable “for a share of Notional’s total liquidity in a given currency across all active maturities”. nTokens are interest-bearing, meaning holders can earn a passive income by simply holding the asset. The nToken mechanism uses a design that doesn’t require users to interact with the liquidity pool directly. Plus, nTokens are freely transferable across the crypto market.
Under the hood, the nToken account will mint a pair of correlating fCash tokens. Then, the protocol deposits cTokens and the positive fCash to receive liquidity tokens. Further to the liquidity tokens, the nToken account holds the negative fCash tokens in its portfolio. Resultantly, at any one time, the nToken is representative of three different assets: cTokens, fCash, and liquidity tokens. Upon nToken holders wanting to redeem their assets, they can receive a “single net cToken amount”. This process is super simple and occurs in a single transaction!
Notional Crypto AMM
Another aspect of the Notional crypto ecosystem is its automated market maker (AMM). The open-source AMM model was introduced and popularized by Uniswap on Ethereum and PancakeSwap on Binance Smart Chain (BSC). Boilerplate AMMs use a “x * y = k” algorithm. In short, “x” and “y” represent different tokens in a pool, while “k” represents a fixed constant. However, this algorithm has its limitations. Therefore, Notional Finance took this algorithm and built upon it to create a trading curve that can “accommodate market repricings”. As a result, the Notional crypto platform implements dynamic curve sensitivity.
Curve sensitivity refers to the amount of slippage within a trade or the difference between the value transacted and the value received. Often, as a free market, the value of cryptocurrencies will fluctuate during a transaction. As such, with Notional Finance priding itself on fixed-rate terms, the project introduces an automated market maker (AMM) with a dynamic or adjustable curve with unique characteristics. The Notional crypto AMM uses three variables; the anchor, scalar, and liquidity fee.
Decreasing the scalar value steepens the curve, increasing sensitivity, thus increasing the slippage amount. Conversely, Notional can flatten the curve by increasing the scalar value, reducing any slippage during trades. The movement of the anchor value will then influence the position of the curve up and down the xy-plane. As a result, users of the Notional crypto AMM can be assured that their borrowing, lending, and trading rates will not suffer as a result of slippage.
Exploring Notional Finance and the NOTE Token Summary
Notional Finance is a next-generation decentralized finance (DeFi) application with sophisticated infrastructure. Focusing on decentralization, security, and global accessibility, the Notional crypto ecosystem offers permissionless borrowing and lending facilities. Removing costly and sometimes discriminative financial intermediaries, Notional is opening a wealth of opportunities for those often unable to access traditional banking facilities.
The project achieves this using its innovative fCash mechanism, an on-chain cryptographically-automated management system of the borrowing and lending activities. Furthermore, holders of the native Notional Finance token (NOTE) receive governing rights over the Notional crypto ecosystem. The NOTE token aids the project in achieving decentralization via community governance. Additionally, users of Notional Finance can earn a passive income by becoming a liquidity provider and earning rewards in the NOTE token. Notional Finance is a cutting-edge decentralized application (dApp) and pioneering project with a global social focus.
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