The Notional Finance community AMA Review: The advantages of the Notional Agreement

According to BlockBeats, Notional Finance held a community AMA on July 30, Kyle, head of marketing at Notional Finance, spoke with Jeff Wu and Teddy Woodward, Notoinal's co-founders.

The following BlockBeats collate the text content of this AMA:

Kyle: Hello and welcome to Notional Finance AMA. I'm Notional. Marketing director. Ahead of today's AMA, we've been collecting questions from users through social media channels and Discord to discuss some of the recent Notional news. Join our Discord group or follow us on Twitter and we'd love to answer your questions. Okay, let's get started. This is the first time we've held a community meeting of this kind, so let's give you a little bit of background and your plans,

Teddy:Okay, I'm the finance guy on the team. I started my career in the interest rate swaps business at Barclays in London, where I worked for four years. Then I did crypto trading for a year and a half, and then I moved to San Francisco and started working on DeFi, and then I met Jeff at the DeFi hackat in November 2019, and we got along really well and decided to focus on Notional Finance together.

Jeff:I'm in technology, and I moved to the San Francisco area in 2011 to work for Atlassian as an early employee. This is a software design company for software developers and project managers. The company's main product includes Confluence for collaborative teams. I left the company around 2017 and started moving into encryption. I learned more about Ethereum, then saw MakerDAO and became fascinated with the DeFi field, which I thought was very applicable to Ethereum.

Then, around 2018-19, I worked as a product manager at Splunk, another SAN Francisco-based tech company focused on data analytics and data engineering. So I've really seen how the blockchain space is evolving with both public and private chains and consortium chains and so on. Through that experience, I felt that the really exciting things had to happen on public chains, like Ethereum and Bitcoin.

Teddy and I met at the end of 2019, and we were both very interested in fixed rate lending, because we saw the birth of Compound and thought it was a cool idea, and we both knew that fixed rate was a much bigger market opportunity, something that was more common in traditional finance.

We wanted to build a product like this, and even though it wasn't perfect, we won the first prize at the hackathon. The results also gave us confidence that enough people were interested in the idea. Since then, it's been a very interesting journey. I love working with Teddy. Like a lot of the economic and business stuff that we do, and I do a lot of coding and stuff like that.

Kyle: Ok, I think the big news for us recently is the launch of version V2, and a lot of people have some questions about it. V2 has been announced but it's not available yet. What are the main differences between V1 and V2? What has changed in terms of user experience?

Teddy:Ok, no problem. What I would say is that there are many differences in nature, but for the end user, there are two major differences. The first difference is that we support longer data durations. When we launch, we will launch in three months, six months and a year, we still have three months and six months, we will launch in a year. Our system is designed in such a way that it can last one year, two years, five years, even 10 years, 20 years. Of course, it will take some time to actually implement this design. But we have the ability to do that if the time is right.

Another difference between V2 and V1 is that we've improved the liquidity provider experience, we've integrated Compound, which will significantly increase the return rate for liquidity providers who will provide cDAI, So liquidity providers would get a Notional return plus a Compound return on lending capital. Second, LET me introduce you to N tokens, which can automatically roll returns to liquidity providers and provide liquidity in a completely passive way. This is different from phase 1, where liquidity providers had to choose the individual maturities and personal liquidity pools they wanted to provide liquidity to.

First, I need to find out at what maturity the liquidity providers want to provide liquidity. It is not clear which they should choose. Once the pools mature, they have to move from one maturity date to the next. In fact, in V1, the liquidity provider had to participate in many steps, but in version V2, we basically automate all the processes, which will be a much better experience for the liquidity provider. This makes the system very secure.

And a better liquidity provider experience means more liquidity, v 2 on Notional, which means the end user, the actual lender and borrower, will get a better price.

Kyle: Ok, that part is pretty clear. Maybe we should talk a little bit about some of the questions we get asked a lot: like the difference between a Notional loan and other loan product agreements. Obviously, the main difference is that we have a fixed rate rather than a variable rate as most people now know. Can you talk a little bit about how we differ from other fixed rate agreements?

Teddy:Yes, what we've seen recently is more and more fixed-rate protocols, because people think it's going to be a big deal, and people are working on it. So the first thing I would say is that most fixed rate agreements they are similar, all they do is hold assets for liquidity mining, like ctokens, and then pledge them to the vault. And then they have some capital invested, so they give some people a fixed rate and everybody else a variable rate. Elements and Pendle presumably take this approach.

The problem is that it only works for the lender. In these agreements, you can't borrow at a fixed rate, you can only borrow. I understand why they do it. But one of the key advantages of "Notional" is that we cater to both borrowers and lenders. First of all, it means that we can deal with people who want to borrow money, which these other agreements can't. But it's also important for lenders, because basically, borrowers are willing to pay higher rates to lock in their yield rates for the long term.

The fact that we can cater to both lenders and borrowers means that lenders can choose borrowers who are willing to pay higher interest rates. This is a key difference in Notional.

Another difference is another fixed rate protocol, such as Yield protocol, which is similar to our construct. They also allow both borrowing and lending, but we also have two major differences. First of all, our LP experience is a little bit better. I mentioned earlier that we have integrated with Compound, and we have ntokens to help LPS to be less active and have a better experience. This means that Notional has more liquidity, LP has better returns and better prices, and actual lenders and borrowers have fewer slips.

The second difference is that holders of the nToken can borrow against the token. This means that if someone wants to borrow Ethereum on Notional, they can take their ETH and mint nETH, then receive both the interest rate and the NOTE token, and then continue to do so. Instead of just putting ETH in Notional for nothing, users can optimize their revenue. This is special because borrowers can optimize their returns. They got the collateral. That's something you can't do with Yield. So it's a more effective experience for everyone, for liquidity providers, for lenders and for borrowers.

Kyle: So one of the differences that Notional can do is it can serve both borrowers and lenders. I think this leads to the next question, such as how do we deal with security issues for v2 releases. Jeff, what do you think about this?

Jeff:Safety is our highest priority, above all else. When you hold your money in Notional custody, the contract performs what you do and I can tell you a little bit here. We make sure something is efficient from an economic point of view before we write the code, it will be like you find the best bank for your money, the Notional economic point of view is designed to be solid. The second thing is, when we write the code, we focus on reliability, and we do a lot of testing. Thousands of tests are performed before it is delivered to an auditor to ensure that it is a high-quality contract when it is delivered to third party inspection.

This way the auditor can really dive into the protocol and they don't have to deal with stupid mistakes. So having clean code and good test coverage is very important. Also, from an auditing point of view, I would say, for those of you who are not from the DeFi point of view or not working in this area, security auditing is very challenging. The timeline for security audits is long and expensive, but that's not our primary concern, and we're lucky enough to be able to communicate with people. We really respect the people in the field, one is APTK, who helped Uniswap do three security checks.

Some very good people who have been in auditing for a long time. We are now actively cooperating with and the second auditing firm Certora. This is a company that specializes in professional testing, where an auditor will either look at the code line by line or write unit tests to verify that certain conditions are true.

Certora 和其他公司不太一样的地方是，他们和我们一起工作，进行检验直接得出所谓的不变性。这些是对某些行为的数学证明。你可以这样理解，例如，如果你现在存了 100 ETH 在 Notional 里，那 Notional 现在需要增加你 100 个你的 ETH 余额，这肯定就是正确的。所以我们要做的就是与安全公司合作，找到这些数学不变性，如果所有这些都是真的，我们会非常确信系统中没有漏洞。

The third thing is the code arena. We are part of the DeFi community and know that there are a lot of great audit firms in these areas who are enthusiastic and evaluate a lot of smart contracts. So we're excited to do the code arena and give these people a chance to take a look at the code, give us feedback, find bugs, and get rewarded.

Finally, this is really an opportunity for us to talk about the code arena and give people a chance to really understand it, especially developers. Teddy and I both thought we could build something interesting on Notional.

Kyle: For those of you who don't know the code Arena. This is a community-led open source bug bounty competition. Part of that, $150,000 USDC plus a $50,000 NOTE token bounty. From August 26 to September 6, it will last for two weeks. Before we start, we'll expose the code so everyone can dig into it and get ready. Next, Teddy, can you talk a little bit about the NOTE issuance and liquidity mining?

Teddy: Ok, the NOTE is a Notional protocol local governance token. The purpose is to decentralize governance and give the community governance rights. We are issuing the NOTE token through liquidity mining. We allocate 50 per cent of our total NOTE supply to liquidity mining, which also reflects the importance of liquidity providers in the system. We've talked a lot about liquidity providers today, but I want to reiterate how important it is. The more liquid Notional is, the better the price lenders and borrowers can get, and the bigger the loans they can take out at a time. So liquidity providers are a key part of this.

The current liquidity mining project is to encourage people to hold ntokens, and I've talked about ntokens before and I'm just going to repeat that and ntokens represent the share of total liquidity in all the different pools of individual liquidity.

If we have nUSDC and ETH and WBTC, then the situation is that the liquidity provider pledges the cToken and then mints the nToken in return, the nToken is the liquidity of the liquidity provider on Notional. The way of liquid mining is that the liquidity provider of each token can obtain a certain number of NOTE tokens, and the number of notes available to the liquidity provider is related to the number of notes it has invested in the token and the nTOKE share held by the liquidity holder of the token. This is a very simple structure. We don't want too much, it's a direct incentive for people to hold on to these tokens and hopefully provide as much liquidity as they can.

Kyle: There are a lot of questions about the airdrop. Can you tell us a little bit about when and how people get their NOTE tokens?

Teddy:To be clear, we are now airdropping but the token is not actually active yet, it will launch with version V2. So I think Jeff can talk more about that. Now basically our first phase is to link the tokens and activate the system so that people can get their NOTE tokens before v2 goes live, it's not locked up until Notional goes live. So there can be a lag of up to a month between people getting their tokens and being able to transfer them. Does Jeff have anything to add?

Jeff:Well, I think it's time to step back and talk about the timeline for the launch of the Notional V2 from now to the current audit of smart contracts. So these code freezes are very much the finishing touch,

Our next step is to launch a test network user interface, which is one of the Notional test networks. - there will be a web version of the V2 test interface, this beta will be released in August, the plan is to launch next week (August 2nd - August 8th) but it will be subject to actual conditions.

It will then take some time, perhaps several weeks, in September to review the results of the audit. We had several other audits at the same time. So we need to digest that feedback. And then we can think about the startup thing, the time coin can be activated and we'll see that some users will receive airdrops of NOTE tokens.

We also hope to open source some off-chain developer tools, such as SDKS, as well as some off-chain code and developer tools, but developer information will be available in September.

If we launch Notional in September, let's say the first term launches at the end of September, maybe the 29th of September. It may not be a great experience for users who want to use Notional and make a loan, their first loan may take up to 2 weeks.

So we want to wait until after that date, early October to configure the boot system. When users choose a 3 - or 6-month period, they get the full 3 - or 6-month period.

Kyle: So in v2, what are some ways that people can get involved? From the technical side like being able to participate in the code arena? Or what's the best way for you to start looking at this process?

Jeff:In the next week or so, we've created a lot of content for developers and auditors to better understand the code base. Therefore, we will open the source code base before the August Code Arena. So I wrote a series of blogs, and I also recorded a video series that kind of explains in code what the different parts of the protocol do.

So these fixed rate loans like all the ways we give the user capital efficiency add some breathing space to the agreement. So what I would say is that for those of you who are interested in technology, when we launch there will be the ability to provide grants from the foundation to developers who want to add features or build products. Welcome to the developer ecosystem, give us some improvements or additions, and we have $150,000 worth of prizes to pay out to those who stand out.

Kyle: Maybe Teddy can tell people from a non-technical point of view how to get involved in the Notional agreement before and after the launch. I understand that part of the initial NOTE token allocation was for some community building projects. Teddy do you have anything to say?

Teddy: Yeah, I would say that if we integrate Notional into the broader DeFi ecosystem, I think there are two interesting things.

First of all, I would like to say that Ntokens are an interesting asset, they can be very profitable and can be redeemed freely. So there are a lot of things like Ctokens or aToken, but we think the nToken yield will be higher than those tokens. I think they will be interesting collateral for other loan agreements, and their nature will allow them to easily integrate the entire DeFi ecosystem to help people get a high yield, reliable and secure USDC, DAI or ETH.

The other thing is that we see fCash as a really primitive currency that will form the basis for a new discovery, a new financial product, and Notional as a kind of base layer to support fCash. The role of Notional is to make sure that fCash is always liquid, always callable, it just handles all the basic things that make fCash liquid and safe.

We're really excited to see people developing financial products that incorporate fCash. One example I can think of is that right now fCash assets are zero coupon bonds. So when you lend the money out for a year, you get all the money back plus the interest after 1 year. If you think about it, if we open for 5 and 10 years, do you really want to borrow for 5 years and just get all the money back? Of course, you might prefer the one that's more common in traditional finance, which is to lend your money and get a fixed interest coupon, say, quarterly payments for the next five years and know exactly what your quarterly payments are. What you can do is essentially bundle the fCash tokens into a bundle, and then this is how much revenue you're going to get over the next five years.

Let's say you just got your last payment, and the next payment is due in a month or so, but you really need the money today because you want to put these assets in another high yielding liquid mining place. Notional essentially guarantees that fCash is always liquid, so you can prepay whenever you want, guaranteeing flexibility.

Kyle: Ok, I have one more question for Jeff. News about Layer 2 solutions continues daily, with new solutions coming online every day. What are Notional's plans for this matter?

Jeff:Ok, let me answer this very quickly. There are many different types of management parameters on Notional that define the structure of fCash and the efficiency of the collateral. We rely a little bit on empirical results and a little bit on data analysis, and when we do decentralized protocols, we want the whole community to be involved in making decisions about these parameters.

So I think people might like to know more about the finance or really like the analytics drive, which is like really getting involved in things like data initiation and these different types of indirection and Settings that we provide to our optimization system. I think it's a great opportunity to get people involved.

Second, our focus now is to do as much mainnet startup as possible. But once we get over that, the next thing is the Layer2 development plan. We've been in touch with a lot of different Layer2 projects. We're analyzing and understanding what the different Layers look like. How do you relate assets to different layers of your user base? Liquidity and so on.

That's what we're evaluating right now, but the Layer 2 plan is definitely on the roadmap.

Kyle: The other thing people are concerned about is the insurance on Notional and how it works. What types of insurance options will be available in the future and how will they work on V1 and V2?

Jeff:Insurance is already available on Notional, so we do have an insurance option for users right now. We are actively engaged with some of the major insurance providers. It's something that I think has a lot of value and it fits very well with our product. If you have a fixed rate, if you take out a loan at a fixed rate and you have insurance, this is a risk-free payment.

Insurance products I think are definitely something we need to go after. That's what we've been thinking about. Our problem is that it's not completely under our control. So we have to work with other agreements to insure and then see if the capacity can meet the needs of our users. It is not entirely under our control, but we are actively pursuing such opportunities.

Kyle: You mentioned briefly that some institutional investors have asked them to join DeFi. How do you see this process?

Teddy:Yes, we often talk about mainstream capital, I have a lot of friends in the traditional financial field and when I meet some mainstream people, actually everyone is interested. Especially at a time when returns on traditional capital are so low, if you can give someone a fixed rate of return of 10%, they're going to be interested.

Now I think it's a process to get them to pull the trigger and join in. There are two main things. First of all, DeFi is very new and people are more willing to experience this kind of agreement, the more mainstream people are more willing to put their capital into an agreement that has been around for a while and that makes people feel comfortable. So we can't expect those very conservative mainstream people to put their capital into this Notional on the first day they know about the deal.

We can conduct security audits and formal verification. Because we want to do everything we can to make sure it's safe, but the ultimate test is time, and over time, it starts to work. Many questions will not be answered until the main network is up and running. The other thing I want to say is that with a system like Notional, interpretation is very important. Most people can't write or read code, so it's important to let them know how the system works and how the money is handled. This all takes a long time and effort to accomplish step by step.

Kyle: I also think the theme of time is very important. I know that Notional has announced that it will open the 1-year pool. What do you think is the process of extending maturities? When people start talking about 5 years and 10 years, people's heads start to get a little confused and they don't even know how it works or what they're doing with it. Can you explain that to us.

Teddy:I guess what I'm trying to say is that if you look at traditional finance, I think the 10-year is the most liquid, the most popular maturity on the bond curve. There's a lot of traditional finance and there's a lot of capital that needs to be invested over the long term. So something absolutely similar exists in the world of traditional finance.

But the first step is we're going to start for a year and we'll see how it goes. So we're going to look at what's the interest rate for 1 year versus 6 months or 3 months? If we see that the vast majority of interest is in the 1 year, because people really want the long term loan, then we'll be more comfortable with the 2 year loan. So I think it's definitely a process of progress. We want to have close communication with our users. We want people to tell us they want a longer loan so we can have confidence.

So I think it's a gradual process. We want to keep close contact with our base of use.

Jeff:As Teddy said, I'm just adding something. I think one of the reasons we don't like to open up all these maturities at the time of issuance is that when the issuer of the stock increases liquidity, it will split between all these different dates. We want to make sure that liquidity is focused on the maturities that people are really interested in and will use. This is just to make sure that we are not wasting quality and that the whole project will get a good return on capital.

Kyle: Ok, we've talked about it several times, what kind of collateral can be put up on Notional V2, and are there other types of collateral that Notional would consider putting in like NFT or something like that?

Teddy:We will support Dai, USDC, USDT, BTC and ETH at launch, but the USDT will not be pledged. We were very careful in designing v2's Notional so that we could have a lot of different types of collateral. We are very hopeful and we are doing fundamental analysis that will guide our decisions about what types of collateral are safe. In the early days, we objected to more types of collateral.

As for NFT, it's a cool thing, but we're still working on it, we're very interested in it. But right now we are more concerned with ensuring system security.

Kyle: So what is the long-term vision of Notional that you can take a moment to talk about? Where do you plan to go in the next few years?

Teddy:Some of the points I mentioned earlier about the integration of Ntokens into the broader DeFi ecosystem need to be addressed. I think the long-term thing here is fCash, which has the critical underlying infrastructure on Notional that allows people to define cash flows at a particular point in time and make sure they are well liquid, allowing them to convert future money into today's money.

That's where I personally think Notional will end up. Interestingly, when you trade derivatives, everything is cash flow. Notional is probably the base tier because it gives you derivatives and cash flow.

Jeff:I also wondered what would become of Notional. I used to work on Ethereum, and the transaction fees are very expensive,

It's kind of like Los Angeles and thinking about what it might have been like in the first few years and I think for me it's like looking at a theorem. Transaction fees are high, and they continue to be pushed higher as the size of transactions continues to grow. I'm looking forward to seeing things like fCash, Notional deployed on Layer 2, giving people who don't have enough money to pay expensive fees a chance to use these financial instruments.

We'll see a lot of interesting products that can be built in an environment with very little or no cost. It gives people more access to retail like Teddy was talking about as a risk-free investment. Like taking out a fixed rate loan, it's a normal thing for people who don't like DeFi, they don't like dealing with interest rate fluctuations and price fluctuations and things like that.

Kyle: Ok, I think that's all for today's AMA. Thank you so much for watching and feel free to join us in our community or Discord.

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