Notional Finance has made the leap from Ethereum mainnet to layer-2 with the third iteration of its fixed-rate borrowing and lending protocol.
The brand new v3 launched publicly on Monday after a month of closed beta testing. It expands past easy bitcoin, ether and stablecoin borrowing and lending to emphasise methods that leverage yield.
An preliminary suite of leveraged vaults on Arbitrum permits customers to borrow considerably in opposition to their preliminary capital. This amplifies their potential yield if the returns exceed the borrowing price, whereas additionally minimizing liquidation threat.
Learn extra: Arbitrum DAO seeking to wager $40M on community protocols
These vaults are designed for superior DeFi customers who’re accustomed to ideas like leverage loping and wish to optimize their yield, Notional’s co-founder and CEO, Teddy Woodward, advised Blockworks.
“Initially, we had thought that folks would use Notional to borrow in opposition to their crypto at a hard and fast fee, after which go take that crypto to do one thing non-financial” like repay a mortgage or auto mortgage, he stated. “And that’s simply fully unfaithful.”
As an alternative, the largest use case is leverage, whether or not for hypothesis or yield-generation.
Notional methods may be protocol-specific or contain putting capital in exterior protocols, comparable to Balancer. For example, a vault may deposit ether (ETH) into liquidity swimming pools and stake the ensuing LP tokens.
Customers should pay attention to the dangers related to these leveraged positions. These embody good contract threat, the opportunity of unfavorable returns when yields are lower than borrowing prices, worth volatility in borrowing or lending, and the danger of liquidation if collateral ratios decline sharply.
Notional’s lean 7-person workforce opted for Arbitrum as a result of it has the biggest whole worth locked (TVL) amongst layer-2 networks, and a DeFi-focused neighborhood.
“I feel they’ve constantly led on product, so it appeared just like the pure selection and, whereas we wish to be on different layer-2s — and we do intend to be in some unspecified time in the future sooner or later — I feel we’re going to deal with Arbitrum proper now,” Woodward stated.
He stays skeptical of guarantees made by proponents of cross-chain interoperability.
“Once you’re speaking about placing vital parts of your internet price, there may be nonetheless actual threat in pushing these cross-chain irrespective of the way you try this,” he stated. “It’s not like funds are simply going to movement seamlessly between chains — at the very least not at any level within the close to future.”
As an alternative, Woodward predicts that nascent cultural variations between layer-2 communities will persist.
“I simply don’t purchase the concept that the underlying layer goes to be abstracted away,” he stated, arguing that there are dangers of making an attempt to take action, and incentives for token holders of no matter their favored chain could also be to want transacting inside a given layer-2 community.
The function of Notional’s governance token, NOTE, is unchanged in v3, however it might “evolve going ahead,” Woodward stated. Presently the token may be staked in an 80/20 NOTE/ETH Balancer pool, whereas sustaining governance rights. The liquidity additionally acts as a protocol backstop, and in change, the protocol directs a number of the charges generated in direction of staked NOTE holders.
Woodward sees an issue with servicing speculative use circumstances.
“There’s an perspective in DeFi that we needs to be in some way higher than this [but] I feel that, finally, monetary speculative use circumstances is admittedly what has product market slot in DeFi and also you form of can’t combat it.”
