Fixed Rate Lending
What is fixed rate lending
When you lend at a fixed rate on Notional, you purchase fCash on Notional's native liquidity pools. fCash are ERC1155 tokens that are redeemable on Notional at maturity for their face value.
When you purchase fCash, you will get more fCash than the amount you lent - for example, you might get 104 fUSDC in exchange for 100 USDC. The extra 4 fUSDC represents the fixed amount of interest you will earn between now and maturity.
Who is fixed rate lending for
Fixed rate lending is for DeFi users who want easy, simple access to a guaranteed yield. When you fix your rate, you get peace of mind and you don't need to worry about your yield going down.
Where does the yield come from
You buy fCash from Notional's liquidity providers. The LPs in the liquidity pools borrow from you at a fixed rate and lend your cash at Notional's variable rate. Your rate is fixed because the LPs are taking risk.
The interest rates on Notional are high because when users borrow they push interest rates up. Many borrowers and leveraged vault users are willing to pay a little bit more to get a fixed rate, and that's why Notional's fixed rates are usually a bit higher than the variable rate on other lending protocols.
What are the risks
When you lend at a fixed rate on Notional, you have three main risks:
Smart contract risk. A hack of Notional’s smart contracts or the smart contracts of any protocol where Notional holds funds could result in loss.
Bad debt risk. All borrowing on Notional is over-collateralized. If the value of a borrower's collateral falls and liquidators don’t purchase the collateral quickly enough, Notional could be left with bad debt.
Interest rate risk. The value of fCash changes as interest rates change. If you hold to maturity, you're guaranteed to earn a fixed rate of interest, but if you exit early you could get more or less than you expected.
Transaction fees
When you lend fixed and buy fCash, you pay a fee. The current fee is 0.3% on the APY. This means that your fee is smaller when you lend for a short period of time and larger when you lend for a long period of time.
For example, if you're lending 1,000 USDC fixed for one year, you will pay an upfront fee of 3 USDC (1,000 * 0.3% * 1 year). But if you're only fixing your rate for six months, that fee will be 1.5 USDC (1,000 * 0.3% * 0.5 years).
Remember - transaction fees also apply if you exit your loan before maturity. If you hold your loan until maturity there is zero fee on exit, but if you exit before maturity the same 0.3% on the APY fee will apply.
What happens at maturity
When your fixed rate loan matures, you will automatically switch over to earning Notional's variable rate. No action needed!
Collateral - fCash is collateral on Notional. That means you can lend fixed and borrow against it!