nTokens are automatically eligible as collateral on Notional which means that users can borrow against them. This feature provides users a high degree of capital efficiency. Consider these two examples:
- A user who wants to borrow at a fixed rate can deposit their collateral, convert their collateral into nTokens, and then borrow against them (all in a single transaction!). This allows the borrower to earn attractive returns on their collateral while it is held on Notional against their debt.
- A liquidity provider can mint some nTokens, borrow against their nTokens, and then mint more nTokens. This allows the liquidity provider to increase their nToken returns in exchange for paying a fixed interest rate. A liquidity provider may want to do this if they expect that nToken returns will be higher than the rate of interest they are paying on their borrowing.
Leverage increases a user’s capital efficiency, but it also increases their risk of liquidation. Before levering up on nTokens, users should be aware that the value of an nToken can go down as well as up. nToken value trends upwards, but unlike cTokens, the value of an nToken does not go straight up.
If a user is borrowing against their nTokens and the value of their nTokens decreases, they could become eligible for liquidation. See here to better understand how the value of an nToken changes over time.