fCash
fCash governance parameters
fCash is Notional's zero-coupon bond like instrument and derives its value from time to maturity and current interest rate levels. fCash assets are thus a claim to a cash flow at a specific point in the future (e.g. 1 fUSDC can be redeemed for 1 USDC upon maturity). The value of positive fCash assets decreases when interest rates increase. Conversely, the value of negative fCash assets decreases when interest rates decrease.
fCash assets can be used as collateral in Notional V2. Consequently, if the value of fCash decreases and an account's free collateral value turns negative as a consequence, a portion of the account's fCash assets could be put up for liquidation at a discount to the fCash market value.
The size of the move in the value of fCash that the protocol can withstand before an account becomes undercollateralized is dictated by the fCash Haircuts & Debt Buffers and the fCash haircut & buffer liquidation discounts.
fCash haircut & buffer liquidation discounts
The fCash haircut liquidation discount is an adjustment made to the oracle rate used to calculate the purchase price of fCash during liquidation. The fCash liquidation haircut must be smaller than the fCash haircut and is denominated in 5 bp increments (i.e. a value of 10 would equate to 50 bps).
Purpose of the fCash haircut & buffer liquidation discounts
The fCash liquidation discounts act as an incentive for liquidators to recapitalize accounts with collateral requirements. fCash liquidation discounts should cover the expected trading costs associated with the liquidation of an fCash position and provide a sufficiently large additional premium as a liquidation incentive to attract liquidators.
Selected parameters
We selected an fCash liquidation haircut value of 30 (150 BPS) for every supported cash group:
In our opinion, 150 BPS is a sufficient incentive to attract liquidators and should cover the expected trading costs (gas fees and bid-ask spread) associated with the liquidation of an fCash position.
fCash haircuts & debt buffers
fCash haircuts and Debt buffers are adjustments made to the oracle interest rate denominated in 5 bp increments (i.e. a value of 10 would equate to 50 bps) used to value positive fCash balances (fCash haircut) and negative fCash balances (debt buffer) during the free collateral calculation.
Purpose of the fCash haircuts & debt buffers
The purpose of the fCash haircuts & debt buffers is to mitigate interest rate risk.
As an example, an increase in interest rates would lower the present value (PV) of a positive fCash position while a decrease in interest rates would lower the PV of a negative fCash position.
The fCash haircuts (debt buffers) allow Notional’s governance to mitigate this risk by applying haircuts (buffers) to the value of fCash assets thus recognizing only part of their value as collateral. The haircuts (buffers) increase Notional’s ability to withstand the decline in an account's collateral value following a sudden change in interest rates if it arises before it can be properly liquidated.
Selected parameters
We selected an fCash haircut (debt buffer) value of 110 (550 BPS) for every cash group initially supported. This implies a 400 BPS premium over the fCash liquidation haircut (150 BPS) and thus protects the protocol against sudden changes of +- 400 BPS in interest rates. Taking into account the oracle rate time window of 6 hours, we believe it is appropriate to protect the protocol against large interest rate changes.
Settlement penalty rate (5 BPS)
The settlement penalty rate is the adjustment made to the 3 month oracle interest rate when a third party is rolling an account’s unsettled debt forward. The third party effectively lends to the settled account at the 3 month oracle rate plus the settlement penalty rate.
Selected parameters
We selected a settlement penalty rate of 40 (200 BPS) for all cash groups with the expectation that such an incentive on the 3 month oracle rate will be sufficient to incentivize users to lend to unsettled accounts.
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