Notional FinancePrice

(NOTE)

Notional Finance is a decentralized protocol designed for fixed-rate, fixed-term lending and borrowing. It achieves fixed rates through a financial primitive called fCash. Users can buy fCash at a discount to lend capital or sell fCash to borrow capital. These transactions mimic zero-coupon bonds, where fCash is redeemed for its full face value at a specific maturity date. This structure provides users with certainty regarding their interest rates, shielding them from the volatility typically found in variable-rate decentralized finance markets.

fCash and nTokens serve different roles within the system. fCash represents a claim on a specific amount of an asset at a set future date, allowing users to lock in fixed rates for borrowing or lending. In contrast, nTokens are tokens representing a user's share in the protocol's total liquidity. By holding nTokens, users act as liquidity providers, automatically earning interest and fees across all active maturities. In the protocol’s third version, fixed-rate positions that reach maturity are converted into Prime Cash, which earns variable rates, ensuring continuous yield without manual rollovers.

NOTE is the native governance token of the protocol. It allows holders to propose and vote on key parameters through official Improvement Proposals. Governance duties include setting collateral requirements, adding new assets, and determining incentive rates for liquidity providers. Additionally, NOTE is used as a reward to incentivize users who provide liquidity to the system. Under specific governance updates, the protocol may utilize a portion of its fees and protocol-owned tokens to perform buy and burn operations, which reduces the overall supply of NOTE tokens over time.

Users can stake NOTE by providing liquidity to a designated NOTE/ETH pool on decentralized liquidity platforms. In return, they receive sNOTE. This staking model serves two main purposes: rewards and security. Holders of sNOTE earn swap fees from the pool and additional protocol-directed incentives. From a security standpoint, sNOTE acts as a backstop for the protocol. If the system encounters a shortfall or bad debt, a portion of the assets in the sNOTE pool can be auctioned to cover the losses and protect the protocol's solvency.

Leveraged Vaults are specialized smart contracts that allow users to borrow funds from the protocol at fixed rates to deposit into external yield-bearing strategies. This setup enables users to gain significant leverage—sometimes up to 20x—on their assets to maximize potential returns. However, this high leverage comes with risks. The primary concern is liquidation risk; if the value of the assets within the vault falls below the debt value plus a safety margin, the position may be liquidated. Users also face smart contract risks associated with both the vault and the external protocols utilized.

The protocol announced a cessation of its V3 operations on various blockchain networks following a crisis involving bad debt triggered by vulnerabilities in external liquidity protocols. To manage this, the team implemented a recovery plan. Positions for cross-asset borrowers are being migrated to other leading lending protocols. While users in certain affected vaults experienced losses due to the external protocol failure, a manual withdrawal process has been established for other users to exit their positions. The future of the governance token now involves overseeing legacy systems and navigating a recovery phase.