Notional Finance — NOTE Tokenomics Explained

Times have changed as have the tools of traditional finance. What started with Bitcoin has unfolded into tens of thousands of digital tokens, more than 2 trillion dollars of investment, all aimed at one goal of achieving financial freedom. DeFi has accelerated this space bringing in more users, investment, and technology in a very short span of time.

DeFi is dynamic as are the interest rates offered on borrowing and lending. The interest rates are calculated per block based on the market supply and the demand. These variable interest rates can deter users who want to see a fixed return. For someone who is paying a mortgage on the house or someone who has fixed expenses, clarity, certainty, and stability are important. All that translates to a stable interest rate.

We have come a long way and are at the cusp of transitioning into Web 3.0. This means newer opportunities, use cases, and projects. One such project which is aimed towards solving the above-mentioned problem of dynamic interest rate is Notional Finance. It was born out of the need for a decentralized financial platform providing the ability to facilitate long-term lending markets in order to create an alternative to the global financial system that could match the utility of the traditional system. It was able to manage investments from heavyweights including Coinbase Ventures, Pantera Capital, Nascent among others.

Understanding Notional Finance

Notional Finance offers fixed-rate borrowing and lending on Ethereum. It creates certainty in a world of uncertainty facilitating fixed-rate, fixed-term crypto-asset lending and borrowing through fCash. fCash tokens are the building blocks of the Notional system. These are transferable and represent a claim on a positive or negative cash flow at a specific point in the future.

Fixed-rate lending enables users to minimize risk and plan effectively for the longer term. Users can lend up to a time period of one year without any penalty for an early exit.

Users can additionally lend cTokens which are the interest-bearing tokens of Compound Finance for the same assets. cTokens are used within Notional to increase returns for liquidity providers thus bringing composability.

For borrowers, a fixed rate removes the risk especially for long-term investments and operations with the borrowed capital.

Lenders and borrowers don’t trade against each other directly, they trade against liquidity providers. These liquidity providers ensure that there is always cash and fCash available for either lenders or borrowers at any point in time and receive trading fees in return. For higher yields, Users can provide liquidity and in turn, get rewarded through variable yield (not fixed) and additional yield through note incentives.

Users provide liquidity through nTokens that are ERC20 assets redeemable for a share of Notional’s total liquidity in a given currency across all active maturities. These allow users to passively provide liquidity for an entire currency.
For more details, check out the docs.

Diving into $NOTE Tokenomics

An engaged community can drive the growth of the project and as such, it is important for projects to share ownership with the community. NOTE tokenomics has been designed to cater to the aforementioned purpose. NOTE is an ERC-20 and the governance token of the Notional Protocol. In addition to providing a governance mechanism for the protocol, NOTE rewards liquidity providers. It is intended at creating a long-term incentive for the health of the project as well as the growth of the community. It is focused and centered around fixed-rate interest products that have the potential of creating so many associated use cases and expanding the fixed-rate ecosystem.

NOTE enables users to propose, vote, and implement changes directed at upgrades and/or the betterment of the protocol. Common proposals include setting liquidity fees, changing required collateralization ratios, determining liquidity emission rates, introducing new collateral types, opening up newly available maturities to borrow and lend in different currencies.

NOTE holders can also delegate their voting rights. The token provides one vote per one token held. A governance proposal once created has a 2 day review period, 3 day voting period and if at least 4,000,000 votes are cast and a majority vote for the proposal, the proposal is passed and queued in the Timelock. The proposal can be implemented 2 days after it moves to the Timelock. In total, any change to the protocol takes at least one week.

The total supply of $NOTE is capped at 100 million. The circulating supply of NOTE is quite low and the vesting schedule for the team is 3 years. The allocation is given below -

  • Founders and Team — 20 million tokens with 3 years vesting that accounts for 20% of the total supply.
  • Future Team — 3.5 million with 3 years vesting accounting for 3.5% of the total supply.
  • Early Investors — 19.8 million tokens with 3 years vesting that accounts for 19.8% of the total supply.
  • Development Grants and Community Building — 6.6 million tokens account for 6.6% of the total supply.
  • Liquidity Incentives — 50 million tokens accounting for half of the total supply.
  • 20 million NOTE for year 1,
  • 15 million NOTE for year 2,
  • 10 million NOTE for year 3,
  • 5 million NOTE for year 4.

The aforementioned schedule is subject to change.

Honoring its commitment to community ownership, the Notional team rewarded early users with a retrospective airdrop. The total number of tokens airdropped was 750,000.

All users who had borrowed, lent, or provided liquidity in an amount greater than or equal to 50 DAI/USDC as of Jul. 4, 2021 00:00 GMT were eligible to receive between ~600 NOTE and 1800 NOTE. 741 addresses were eligible for this airdrop (here).

Conclusion

In a land of so many fork designs, Notional offers something which is very different from the existing norms of the decentralized financial space i.e. stable interest rate. It has the potential of tapping and venturing into an extended user base offering the benefits of traditional finance. As the project becomes more decentralized, the Notional team intends to step back from the protocol governance which means only NOTE holders will have the power to drive it.

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