fCash tokens are the building blocks of the Notional system. fCash are transferable tokens that represent a claim on a positive or negative cash flow at a specific point in the future.
fCash tokens are always generated in pairs: assets and liabilities. Assets and liabilities always net to zero across the Notional system.
In Notional V2, an fCash token's denomination currency is distinct from it's settlement currency. fCash is denominated in an underlying token like DAI or USDC, but it is settled in a cToken like cDAI or cUSDC. For example, upon maturity, 100 Dec 1 2021 fDAI is not directly redeemable for 100 DAI, rather it is redeemable for 100 DAI's worth of cDAI which is then freely convertible into DAI at the user's will.
Splitting the denomination currency from the settlement currency allows us to optimize Notional's capital efficiency with cTokens (ex. cDAI) while still enabling fixed rate lending and borrowing of the underlying tokens (ex DAI). Here's how:
- Liquidity providers deposit cTokens into Notional liquidity pools instead of the underlying currency. This significantly increases their returns because they are getting the baseline cToken lending rate on their capital in addition to the fees they earn in the Notional liquidity pools.
- Notional cash balances (denominated in cTokens) passively accrue interest denominated in the underlying (ex DAI). This means that a fixed rate loan will begin to accrue the variable cToken lending rate as soon as it reaches maturity even if it hasn't been rolled forward.
Upon an fCash asset's maturity, Notional determines the amount of cTokens (ex cDAI) that is equivalent to the fCash asset's amount in the denomination currency (ex DAI) and converts the account's fCash into that amount of cTokens. For example, upon maturity, 100 Dec 1 2021 fDAI will convert to 100 DAI's worth of cDAI as of December 1st 2021.
Mechanically, the cDAI settlement amount is determined by the settlement exchange rate. The settlement exchange rate is defined as the cDAI/DAI exchange rate as of maturity. The settlement exchange rate is unknown prior to maturity, is set upon maturity, and remains unchanged after maturity.
Here's how the value of 100 Dec 1 2021 fDAI changes as time passes and the cDAI/DAI exchange rate changes:
Note that the "cDAI to Redeem" is set at the exact amount such that the DAI value of "cDAI to Redeem" equals the face value of the fCash at maturity. Note also that "cDAI to Redeem" stays constant after maturity even as the DAI value of "cDAI to Redeem" increases. This reflects the fact that Notional cash balances passively accrue the cToken lending rate.