Local-Currency Risk Factors

To calculate a user's max LTV, Notional needs to know their loan value and their collateral value. Notional then applies the collateral factor and borrow factor. If the risk-adjusted LTV is greater than 1, the user can be liquidated.

But before we get to the collateral and borrow factors, Notional will first apply haircuts/buffers when calculating their collateral value and loan value based on the type of collateral and debt assets in their account. These haircuts/buffers are called local-currency risk factors.

This means that the loan value and collateral value used in the risk-adjusted LTV calculation are adjusted by the local-currency risk factors.

Notional does this because some asset types are riskier than others. For example, nTokens are riskier than prime cash so Notional won't let users borrow quite as much against nTokens as against prime cash.

Asset types

Asset Type	Risk Level	Collateral Haircut	Borrow Buffer
Prime Cash	Zero	0%	0%
fCash	Very low	2% - 10%	2% - 10%
nTokens	Low	10% - 20%	N/A

Prime cash

Notional doesn't apply any haircut or buffer to prime cash because it's not considered risky. Prime cash is always directly redeemable for cash and it does not decrease in value.

fCash

fCash is slightly more risky than prime cash because of interest rate risk. Because of this, Notional applies haircuts and buffers to fCash values by adjusting the interest rate that is used to value them.

For fCash that's held as collateral, Notional will value it using a higher interest rate than the oracle rate. The amount of this adjustment is called the fCash haircut.

For fCash that's held as debt, Notional will value it using a lower interest rate than the oracle rate. The amount of this adjustment is called the fCash buffer.

Example fCash value calculations

// fCash maturing in 0.5 years

oracle rate = 5%
fCash haircut = 2%
fCash buffer = 2%
time to maturity = 0.5
fCash amount = 100

un-adjusted fCash value = 100 / e^(.05 * .5) = 97.53
collateral fCash value = 100 / e^((.05 + .02) * .5) = 100 / e^(.07 * .5) = 96.56
debt fCash value = 100 / e^((.05 - .02) * .5) = 100 / e^(.03 * .5) = 98.51

// fCash maturing in 0.25 years

oracle rate = 5%
fCash haircut = 2%
fCash buffer = 2%
time to maturity = 0.25
fCash amount = 100

un-adjusted fCash value = 100 / e^(.05 * .25) = 98.76
collateral fCash value = 100 / e^((.05 + .02) * .25) = 100 / e^(.07 * .25) = 98.27
debt fCash value = 100 / e^((.05 - .02) * .25) = 100 / e^(.03 * .25) = 99.25

nTokens

Notional applies a haircut to nTokens that are held as collateral because the value of nTokens can decline as well as rise. The nToken haircut varies by currency.

Example calculations

Here are some example LTV calculations for users with different portfolios.

Example 1: Prime ETH collateral vs. Prime USDC debt

Collateral: 2,000 USDC worth of Prime ETH
Debt: 1,000 USDC of Prime USDC
ETH collateral factor: 0.8
USDC borrow factor: 1.1
Prime ETH collateral haircut: 0
Prime USDC borrow buffer: 0

LTV = 1,000 / 2,000 = 0.5
Risk-adjusted loan value = 1,000 * (1 + 0) = 1,000
Risk-adjusted collateral value = 2,000 * (1 - 0) = 2,000
Risk-adjusted LTV = 1,000 * 1.1 / 2,000 * 0.8 = 1,100 / 1,600 = 0.6875

Max LTV = 0.5 / 0.6875 = 0.727

Example 2: nETH collateral vs. Prime USDC debt

Collateral: 2,000 USDC worth of nETH
Debt: 1,000 USDC of Prime USDC
ETH collateral factor: 0.8
USDC borrow factor: 1.1
nETH haircut: 0.15
Prime USDC borrow buffer: 0

LTV = 1,000 / 2,000 = 0.5
Risk-adjusted loan value = 1,000 * (1 + 0) = 1,000
Risk-adjusted collateral value = 2,000 * (1 - 0.15) = 1,700
Risk-adjusted LTV = 1,000 * 1.1 / 1,700 * 0.8 = 1,100 / 1,360 = 0.8088

Max LTV = 0.5 / 0.8088 = 0.618

Example 3: fETH collateral vs. fUSDC debt

Collateral: 2,000 USDC worth of fETH
Debt: 1,000 USDC of fUSDC
ETH collateral factor: 0.8
USDC borrow factor: 1.1
Debt value post-fUSDC buffer: 1,020
Collateral value post-fETH haircut: 1,960

LTV = 1,000 / 2,000 = 0.5
Risk-adjusted loan value = 1,020
Risk-adjusted collateral value = 1,960
Risk-adjusted LTV = 1,020 * 1.1 / 1,960 * 0.8 = 1,122 / 1,568 = 0.7156

Max LTV = 0.5 / 0.7156 = 0.699