Introducing Leveraged Vaults

Teddy Woodward -

After many months of work, we’re excited to formally announce the next leap forward for Notional and for all of DeFi lending - leveraged vaults.

Leveraged vaults allow users to borrow cash at a fixed rate from Notional and deposit it into a whitelisted smart contract executing a specific yield strategy. The innovation? All the assets in the smart contract act as liquidatable collateral for their debt, allowing users to get highly leveraged exposure to the strategy. If the strategy returns exceed the interest rate to borrow, using leveraged vaults will be highly profitable.

Leveraged vaults increase capital efficiency for users without forcing lenders to take any kind of credit, or uncollateralized risk. Lenders are protected with the same time-tested principles of overcollateralization and liquidation. If the value of the assets in the smart contract declines below a minimum threshold, users can be liquidated and their debt will be repaid.

Example walkthrough

To use a leveraged vault, a user will need to bring some amount of initial capital, select a debt maturity and leverage ratio, and then execute the transaction. Notional will then borrow from the corresponding liquidity pool on behalf of the user and deposit the borrowed capital along with the user’s initial capital into the vault.

Let’s take a look at an example using the Balancer/Aura Boosted Stablecoin LP strategy. In this strategy, USDC is placed into the Balancer boosted pool, the LP tokens are then staked in Aura, and the incentives are periodically harvested and reinvested.

To initiate the position, the user brings 100k USDC initial capital to Notional. The user then borrows 700k USDC from Notional at 4% fixed for three months and deposits a total of 800k USDC (100k initial capital + 700k borrowed) into the vault.

Over the three month term, the vault earns an average of 8% APY, turning 800k into 816k. At maturity, the user pays off the debt + interest on notional (707k USDC) and keeps the remaining 109k USDC. This nets the user a 36% APY on their 100k USDC over the three month term.

The vault user is able to earn outsized returns on their USDC by taking advantage of the fact that Notional’s borrow rate is lower than the rate they have earned on the strategy. But the strategy involves risk - the user can also lose money if the strategy fails to return enough to cover the interest rate they’ve paid on their debt. The more leverage the user takes on, the greater their potential upside and downside.

Benefits of leveraged vaults for Notional users

leveraged vaults will change the dynamics of Notional’s lending markets and improve returns for all of Notional’s users, not just the users who directly use the vaults.

  • Lenders will get access to higher interest rates due to the increased borrowing demand driven by leveraged vault users.
  • Liquidity providers will earn more fees from the increased usage.
  • The protocol will earn more revenue from transaction fees and reduce its dependency on liquidity incentives because organic profitability for LPs will increase.

Go live

Notional is targeting an October launch and will go live with an initial set of three leveraged vaults that offer high, sustainable returns with low risk. These are the initial strategies:

Balancer/Aura wstETH/ETH LP strategy

  • Users will borrow ETH from Notional to deposit into a strategy that puts the ETH into the Balancer ETH/wstETH pool, stakes the LP tokens on Aura, and periodically harvests the incentives.
  • Max leverage: 10X

Balancer/Aura boosted stablecoin LP strategy

  • Users will borrow DAI/USDC from Notional to deposit into a strategy that puts the DAI/USDC into the Balancer Boosted stablecoin pool, stakes the LP tokens on Aura, and periodically harvests the incentives.
  • Max leverage: 10X

fCash spread strategies

  • Users will borrow DAI (USDC) to deposit into a strategy that swaps it to USDC (DAI) and lend the USDC (DAI) on Notional at the same maturity to take advantage of rate differentials in the same maturity between two different stablecoins.
  • Max leverage: 20X

The future of leveraged vaults

Leveraged vaults are a paradigm shift in DeFi lending that will revolutionize the industry. These vaults will improve capital-efficiency in the crypto-native economy and offer lenders the opportunity to earn attractive, fixed rate returns without compromising on trustlessness, transparency, or counterparty risk.

We could not be more excited about the upcoming launch of leveraged vaults and we will continue to push DeFi forward and build toward a decentralized and efficient financial system for the crypto-native economy.

The Notional Team