Notional Finance has made the leap from the Ethereum mainnet to layer 2 with the third iteration of its fixed-rate borrowing and lending protocol.
The brand new v3 was publicly launched on Monday after a month of closed beta testing. It goes past simply borrowing and lending bitcoin, ether and stablecoin and emphasizes methods that leverage returns.
An preliminary set of leveraged vaults on Arbitrum will enable customers to borrow considerably towards their beginning capital. This will increase their potential returns if returns exceed financing prices, whereas additionally minimizing liquidation danger.
Learn extra: Arbitrum DAO needs to wager $40 million on community protocols
These vaults are designed for superior DeFi customers who’re conversant in ideas like leverage loping and need to optimize their returns, Notional co-founder and CEO Teddy Woodward informed Blockworks.
“Initially, we thought folks would use Notional to borrow their crypto at a set rate of interest, after which use that crypto to do one thing non-financial,” like paying off a mortgage or automotive mortgage, he mentioned. “And that is simply fully unfaithful.”
As an alternative, its greatest use case is leverage, whether or not for hypothesis or producing returns.
Notional methods may be protocol particular or contain putting capital into exterior protocols, corresponding to Balancer. For instance, a vault can deposit ether (ETH) into liquidity swimming pools and stake the ensuing LP tokens.
Customers ought to pay attention to the dangers related to these leveraged positions. These embody the chance of sensible contracts, the potential of destructive returns when returns are decrease than financing prices, the value volatility of borrowing or lending, and the chance of liquidation if collateral ratios fall sharply.
Notional’s lean seven-person crew selected Arbitrum as a result of it has the biggest whole worth (TVL) amongst layer-2 networks and a DeFi-focused neighborhood.
“I believe they’ve constantly led the way in which on product, so it appeared just like the logical selection and whereas we wish to be at different tier 2 ranges – and we intend to in some unspecified time in the future sooner or later – I believe I believe we’re too. I will give attention to Arbitrum now,” Woodward mentioned.
He stays skeptical in regards to the guarantees made by proponents of cross-chain interoperability.
“If you’re speaking about deploying important parts of your web value, there’s nonetheless actual danger in pushing that cross-chain irrespective of the way you do it,” he mentioned. “It’s not the case that funds will merely stream seamlessly between chains – a minimum of not at any level within the close to future.”
As an alternative, Woodward predicts that rising cultural variations between layer 2 communities will persist.
“I simply do not buy the concept that the underlying layer goes to be abstracted,” he mentioned, arguing that there are dangers concerned in attempting to do that, and that there are incentives for token holders of no matter their most well-liked chain is to maintain the to offer desire to transactions. inside a given layer 2 community.
The function of Notional’s governance token, NOTE, is unchanged in v3, however could “evolve sooner or later,” Woodward mentioned. Presently, the token may be staked in an 80/20 NOTE/ETH Balancer pool, whereas retaining governance rights. The liquidity additionally acts as a protocol backstop, and in return the protocol sends a portion of the charges generated to the affected NOTE holders.
Woodward sees an issue with entertaining speculative use instances.
“There’s an perspective in DeFi that now we have to be higher than this one way or the other [but] I believe on the finish of the day, monetary speculative use instances are actually what the product market suits in DeFi and you may’t actually struggle towards them.