What Is Notional Finance?
Notional Finance 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 paper they 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.
Quick Fact About Notional Finance
|DEFI Coin Name||Notional Finance|
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|Official Project Website||Click Here To Visit Project Website|
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 (
CASH_RECEIVER) or obligated to pay (
CASH_PAYER) 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.
Notional uses an internal accounting concept called current cash to represent deposits and matured cash flows. Since cash flows may be positive (
CASH_RECEIVER) or negative (
CASH_PAYER), current cash is represented as a signed integer (i.e. positive or negative).
Notional introduces the notion of periodic, rolling maturities to simplify trading and pool liquidity. These maturities are defined by two governance parameters:
G_MATURITY_LENGTH defines how long each periodic maturity will last in seconds.
G_NUM_MATURITIES defines how many of these maturities will be traded in the future. For example, if
G_MATURITY_LENGTH = 1000 and
G_NUM_MATURITIES = 4 and we are starting at time 0, there will be maturities at timestamps 1000, 2000, 3000, 4000. Each one of these maturities will have a pool of fCash tokens that can be bought and sold.
Trading fCash tokens is done via a special liquidity curve that has been designed to minimize slippage when trading fCash tokens. Consider Uniswap’s constant product liquidity curve; it is bounded at zero and positive infinity. The advantage of this curve is that a trade can always find a market price regardless of how much liquidity is in the pool. The disadvantage is that exchange rates must move large amounts in order to accomodate this; the amount of slippage incurred would be intolerable for trading fixed term cash flows. For example, if you were to trade 1% of the liquidity pool using the constant product curve for 1-month fCash,
It could result in a 10% change in the interest rate. On an annualized basis, this means a 120% change in the interest rate. This is simply too volatile for a useful trading experience. Also note that this problem explodes exponentially as the token gets closer to maturity — that 10% change in the interest rate becomes almost a 50% change when the fCash is one week from maturity (a 600% change on an annualized basis). This is why Notional has a special liquidity curve designed for trading fCash that we describe next.
Liquidity tokens have a claim on current cash and
CASH_RECEIVER tokens in the liquidity pool of a specified maturity. As trades occur, the claim the liquidity tokens have will shift between current cash and the cash receivers. Since
CASH_RECEIVER tokens hold no value in the free collateral calculation, the amount of current cash an account has available to collateralize other obligations will shift as trades occur.
In order to give liquidators time to react to this while the account still has enough cash on had to cover their shortfall we will haircut both the current cash and cash receiver claims on the liquidity token, using the
G_LIQUIDITY_HAIRCUT parameter. The calculation is as follows:
Manages a account balances for the entire system including deposits, withdraws, cash balances, collateral lockup for trading, cash transfers (settlement), and liquidation.
Free collateral represents the amount of excess collateral an account holds beyond what it needs to collateralize its obligations. It represents the buffer that the account has to withstand market volatility, the amount of collateral an account is allowed to withdraw from Notional, as well as the approximate maximum amount that the account is allowed to borrow. There are three sources of positive collateral: cash balances,
CASH_PAYER tokens represent obligations and are the only source of negative collateral.
CASH_PAYER tokens convert to negative cash balances as maturity which will continue to be a source of negative collateral.
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