In preparation for Notional’s upcoming quarterly roll occurring Monday, March 28th at 8:00 PM EST we propose to update some of the protocol’s governance parameters in order to increase capital efficiency across all Notional pools. These changes would lead to lower slippage for borrowers and lenders, and would use LP capital more efficiently.
Better slippage is key to making Notional appealing to large market participants like DAOs and yield aggregators. Moreover, higher capital efficiency is key to making LP returns self-sustainable and could allow the protocol to start slightly reducing NOTE incentives given to nToken holders over the coming months.
Objective : Enable more capital-efficient AMM curves with interest rate ranges of 0% to ~16%. Now that we have more information regarding the traded rates on Notional we can select AMM curves that optimize for tighter interest rate ranges. These new AMM curves will lead to lower slippage for lenders and borrowers. Here is a table showcasing an estimation of the capital efficiency gains between the old USDC & DAI curves and the new ones. For example, if the capital efficiency gain is 100% it means that one could borrow twice as much with the new curve with the same amount of slippage as the old one:
In order for the curves to be more capital efficient, we propose to lower the anchor rates thus shifting the curves down in the X-Y plane. Lower anchor rates will enable the trading of lower rates at higher proportions. In addition, we propose to slightly increase scalar rates to allow for flatter curves and thus more concentrated interest rate ranges.
- ETH : Decrease the anchor rates from 2% to 1% and increase the scalar rates from 18 to 32 .
- DAI : Decrease the anchor rates from 7% to 2% (3M), 3% (6M) and 4%(1Y) , and increase the scalar rates from 19 to 26 .
- USDC : Decrease the anchor rates from 7% to 2% (3M), 3% (6M) and 4%(1Y) , and increase the scalar rates from 19 to 26 .
- WBTC : Decrease the anchor rates from 2% to 1% and increase the scalar rates from 18 to 32.
Objective : Update the leverage thresholds so that they are at ~10% for USDC & DAI and ~7% for ETH & WBTC . If rates are above these levels any incoming liquidity would be lent to push rates down. These leverage thresholds also aim to ensure that the nToken accounts do not become undercollateralized by providing liquidity to individual liquidity pools at leverage ratios that are too high.
- ETH : Set the leverage thresholds to 0.88 (3M) and 0.88 (6M) ;
- DAI : Set the leverage thresholds to 0.90 (3M) , 0.87 (6M), 0.85 (1Y)
- USDC : Set the leverage thresholds to 0.90 (3M) , 0.87 (6M), 0.85 (1Y)
- WBTC : Set the leverage thresholds to 0.88 (3M) and 0.88 (6M) .
Objective : Allocate more capital to the pools with higher lending/borrowing demand. We have historically seen more market demand for 3 Month and 6 Month maturities for stablecoins. Therefore we propose to allocate a bit more liquidity to the 6 Month USDC & DAI pools from the 1 Year pools. We have also seen slightly more demand for the 3 Month ETH and WBTC markets than the 6 Month. We propose to reallocate some liquidity from the 6 Month to the 3 Month pools.
- ETH : Change the deposit shares from 40% (3 Month) and 60% (6 Month) to 50% (3 Month) and 50% (6 Month) .
- DAI : Change the deposit shares from 40% (3 Month) , 35% (6 Month) , and 25% (1 Year) to 40% (3 Month) , 40% (6 Month) , and 20% (1 Year) .
- USDC : Change the deposit shares from 40% (3 Month) , 35% (6 Month) , and 25% (1 Year) to 40% (3 Month) , 40% (6 Month) , and 20% (1 Year) .
- WBTC : Change the deposit shares from 40% (3 Month) and 60% (6 Month) to 50% (3 Month) and 50% (6 Month) .
Objective : Initialize the new markets with proportions in line with current rates.
- ETH : Initialize the 6M market at a proportion of 0.63 (2.7%)
- DAI : No change
- USDC : No change
- WBTC : Initialize the 6M market at a proportion of 0.64 (2.8%)
Objective : Enable more capital-efficient pools and have more flexibility during the Anchor and Scalar rate selection process.
All cash groups : Increase the maximum proportion from 0.96 to 0.99 .
fCash haircuts & buffers
Objective : Decrease the fCash haircuts and buffers to lower the collateral requirements for lenders and borrowers. The downside of lowering the fCash haircuts and buffers is a slight increase in insolvency risk to the protocol in the advent of a large interest rate move. With the new AMM curves we believe a reduction in the fCash haircuts and buffers is appropriate. With the proposed parameters, the protocol would still be protected from a 4% (5.5% haircut/buffer - 1.5% liquidation discount) interest rate move vs a 6% (8% haircut/buffer - 2% liquidation discount) move before the update.
All cash groups : Decrease the fCash haircuts and fCash buffers from 160 (8%) to 110 (5.5%) and decrease the fCash haircut and buffer liquidation discounts from 40 (2.0%) to 30 (1.5%) .