Recently, Delphi Digital released the report "The Future of DeFi in 2024", which discussed in depth the future trends in the field of DeFi (decentralized finance). Among them, one of the narratives that has attracted much attention is the Interest Rate Derivative Protocols, which is believed to be a hot topic in the crypto field.
In this exciting field, the Notional protocol, with its unique characteristics, is considered one of the few sustainable interest rate derivatives protocols and has attracted widespread attention and discussion. Here is an introduction to this project.
Notional Finance is an interest-rate lending protocol built on the Ethereum blockchain. Its uniqueness lies in the integration of the Compound protocol and the use of the zero-interest bond model in traditional finance to provide users with a variety of lending options.
The latest version of the Notional protocol, Notional V3, was launched on the Arbitrum network in early November this year. This version not only supports traditional fixed-rate lending and variable-rate lending, but also introduces leveraged yield strategies, further enhancing user choice and flexibility.
In addition, users can also deposit their assets into Notional as liquidity providers (LPs) and earn income from them. This feature further enriches the functionality of the protocol.
The underlying mechanism of the Notional protocol works similarly to zero-coupon bonds, commonly known as fCash. Users can borrow assets into Notional's fixed-rate pool at a discount to the asset's face value, thereby obtaining a fixed return on the asset. For example, if you hold 100 USDC and borrow it into Notional's fixed-rate pool at an interest rate of 5.9%, you can get approximately 100.17 fUSDC by March 18 next year, which can then be redeemed back to USDC at a 1:1 ratio.
Similarly, users can also lend assets in an over-collateralized manner, but the longer the loan period, the higher the interest to be paid. However, it should be noted that if the price of the mortgaged assets fluctuates drastically during this process, users may face the risk of being liquidated.
The Notional protocol provides two types of lending: fixed rate and floating rate. Fixed rate lending requires a period of time to mature, while floating rate lending is more similar to Compound, where users can deposit and withdraw funds at any time, but the interest rate may change depending on market conditions. In addition, floating rate lending usually does not require transaction fees, while fixed rate lending requires 8% of the total yield as a fee.
In addition to lending, users can also choose to be LPs on Notional, provide liquidity for the protocol, and earn income in the following ways:
1. Accumulated interest in the fixed-rate pool.
2. Fixed transaction fees for borrowers and lenders in the pool.
3. Incentives for the project’s $Note tokens.
However, over time, the fixed rate may change, resulting in an uncompensated loss of nTokens. This loss is relatively small, but larger than the trading pairs on Uniswap, but still smaller than the trading pairs on Curve.
Notional itself does not implement leverage, but users can use trusted third parties (such as Curve, Balancer or Uniswap) to conduct leveraged transactions. Currently, Notional supports leveraged transactions of Frax. Users can borrow money in Curve and then deposit the borrowed Frax into Notional to obtain high borrowing returns. However, it should be noted that the potential risks brought by leveraged transactions also increase exponentially, and high leverage multiples may require higher maintenance fees.
In general, the Notional protocol provides users in the DeFi field with diverse lending options and opportunities to earn passively, but users should fully understand the risks when using the protocol and make corresponding decisions based on their needs and risk tolerance.
The Notional protocol, with its unique characteristics and continuous innovative development, provides a wealth of investment options and opportunities for participants in the DeFi field. In particular, the introduction of the Notional V3 version will further expand the advantages of the protocol, not only providing a fixed-income interest rate option, but also introducing a floating-rate lending option, providing users with more flexibility.
In addition, the improvement of Notional's debt management mechanism is also worth noting. Instead of automatically converting debt to a variable interest rate, it automatically selects according to market demand, allowing funds to flow more efficiently and no longer be idle. This change is expected to improve the asset utilization rate of users and further increase the attractiveness of investment.
Notional also provides high-leverage arbitrage opportunities. Whether in fixed-rate or floating-rate lending, users can use funds cleverly, flexibly respond to market fluctuations, and pursue higher returns.
In summary, the development of the Notional protocol represents the continuous progress and innovation in the DeFi field. Users can actively participate in interest rate lending and fund management according to their own needs and risk preferences to create more financial opportunities for themselves. However, given the risks in the DeFi field, investors should always maintain a cautious and prudent attitude to ensure the balance between investment security and returns. A full understanding of the operating mechanism of the protocol is an important prerequisite for participating in DeFi investment.