Notional is an on-chain Ethereum protocol, that enables users to lend and borrow at fixed rates at predefined maturities.
Fixed rate, fixed term lending is by far the most common type of lending in traditional financial markets. In 2018, there was $15.3 trillion dollars of debt outstanding in U.S. corporate debt and mortgage debt markets. 88% of that debt was in terms of fixed rates; fixed rates are simply more desireable for consumers of the financial system (i.e. corporations and households) who do not want exposure to interest rate volatility. In this essay we describe Notional, an on-chain Ethereum protocol, that enables users to lend and borrow at fixed rates at predefined maturities. It is inspired by other successful Ethereum protocols such as Uniswap, Compound, and MakerDAO.
DeFi (Decentralized Finance) is an exciting and rapidly growing ecosystem of new financial products that live on the Ethereum blockchain. In 2019, the amount of funds locked up in DeFi products grew from $274M USD to $674M USD and was continuing to grow into 2020.
The benefits of DeFi are clear: users are able to seamlessly lend, borrow and exchange tokens within a financial system that is secure, private, transparent, and globally accessible. Those without access to the traditional financial system are able to participate in the DeFi ecosystem with nothing but an internet connection and tokens; no financial intermediaries exist to create barriers to entry. Since DeFi products are nothing more than autonomous computer programs, they enable an ecosystem of programmable money where different protocols integrate in order to create entirely new categories of products and businesses.
A core, missing component of this ecosystem is fixed rate, fixed term financing. Notional proposes to fill this gap. Notional is heavily inspired by the constant-product market maker used by Uniswap as well as Compound’s collaterlization mechanism. Our contributions include: the concept of fCash, periodic maturities, the portfolio, and cash settlement which we describe in the following sections. We also introduce a novel new liquidity curve that we have designed specifically for trading our fCash tokens.
The Notional Protocol
fCash is a tokenized representation of a fCash flow. It represents the amount of tokens (i.e. Dai) that an account is either entitled to receive or obligated to pay at its designated maturity. For example, if an account holds +100 fCash tokens for a maturity at timestamp 100, it is entitled to 100 Dai at any time greater than or equal to timestamp 100. Similarly, -100 fCash tokens for the same maturity means that the account is obligated to pay 100 Dai at timestamp 100. A detailed description of lending and borrowing mechanics will follow.
fCash in one maturity (i.e. due to mature at timestamp 100) is fungible with other fCash tokens with the same maturity. However it is not directly fungible with fCash with different maturities. Also note that the entitlement to receive fCash is freely transferrable but the obligation to pay is not.
Finally, fCash tokens are not strictly ERC20 tokens because fCash tokens at different maturities are not fungible with each other. fCash tokens can be represented under the ERC1155 token standard which allows for interoperability.
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