Notional Finance Dictionary

Notional Finance is a decentralized, fixed-rate lending and borrowing protocol built on Ethereum. Its goal is to provide users with predictable interest rates and maturity dates, contrasting with the variable-rate nature of many DeFi lending platforms. Understanding the specific terminology is key to navigating this system.

Key Terms:

• fCash: fCash represents a claim on underlying collateral at a specific future date. It’s the core instrument in Notional, representing the future value of borrowed or lent assets. It’s important to distinguish between positive fCash (assets you own) and negative fCash (assets you owe).
• nToken: An nToken is Notional’s yield-bearing token that represents a share of the pool of underlying assets. Users deposit stablecoins like USDC or DAI into Notional’s lending pools and receive nTokens in return. These nTokens accrue interest over time as the pool is utilized for lending.
• Vaults: Vaults are isolated lending markets within Notional for specific assets and maturity dates. Each vault operates independently, mitigating risk by isolating collateral and debt. For example, there might be a USDC vault maturing in 3 months.
• Fixed-Rate Lending: This refers to the ability to lend or borrow assets at a predetermined interest rate for a fixed period. This predictability is a major differentiating factor from other DeFi lending protocols.
• Maturity Date: The date when the fCash contract expires and the underlying collateral becomes available to the lender. fCash must be held (or repurchased to close a position) until this date.
• Exchange Rate: The price at which fCash can be converted into the underlying asset or vice-versa. This rate is determined by the market dynamics within Notional. It will always converge to 1.0 at maturity.
• Secondary Market: fCash tokens can be traded on secondary markets before maturity, allowing users to adjust their positions or speculate on interest rate changes. These markets can exist within Notional or on other DeFi platforms.
• Liquidity Pool: Pools of assets provided by users to facilitate lending and borrowing on the platform. These pools consist of stablecoins, which act as collateral for loans.
• Leverage: Users can leverage their positions by borrowing against their collateral. However, this increases both potential gains and risks. Notional allows for controlled leverage, but it’s crucial to understand the implications before using it.
• Net Borrowing Capacity: The amount of additional assets a user can borrow, considering their existing collateral and debt. This is a key metric for managing risk and maximizing capital efficiency.
• Account Health: A metric that indicates the solvency of a user’s account. If account health falls below a certain threshold, the account can be liquidated.
• Liquidations: The process of selling off a user’s collateral to repay their debt if their account health falls below a certain level. Liquidations are triggered by insufficient collateral or unfavorable market movements.
• Haircut: A percentage reduction applied to the value of collateral to account for volatility and liquidation risks. This reduces the amount of assets that can be borrowed against the collateral.

Understanding these terms is essential for effectively utilizing Notional Finance and navigating its fixed-rate lending and borrowing environment. As with any DeFi platform, thorough research and a solid understanding of the associated risks are crucial before participating.