Providing Liquidity
Overview
Liquidity providers deposit assets into Notional's fixed rate markets. LPs earn interest, fees, and NOTE incentives.
Providing liquidity is passive and usually earns higher yield than variable rate lending or fixed rate lending because of fees and incentives.
Providing liquidity has some IL risk and can be temporarily illiquid. It is best for users who hold their position for the longer term and don't worry about short-term IL.
Creating a position
To provide liquidity, follow these steps:
Go to the provide liquidity page.
Pick a network.
Pick the asset you want to provide.
Input the amount you want to provide.
Click Continue to Review.
Click Submit.
Viewing your position
To find your position, go to the holdings tab on the portfolio page.
This page shows you detailed info about your position. You can see:
Your APY.
How much you deposited.
The current value of your position.
Your earnings.
Managing your position
To manage your position, follow these steps:
Go to the portfolio holdings tab.
Expand the row of the asset you want to manage.
Click the manage button.
This gives you two options. You can:
Convert your liquidity into a variable rate loan.
Convert your liquidity into a fixed rate loan.
Converting to a fixed rate loan
To convert your liquidity to a fixed rate:
Decide on the maturity and fixed rate.
Click submit.
Review details and submit the transaction.
When you convert your liquidity to a fixed rate loan, you will pay a redemption + a fee to enter into a new fixed rate loan position.
Converting to a variable rate loan
To convert your liquidity into variable rate lending, follow these steps:
Select the variable lend option on the manage menu.
Click submit.
Review details and click submit again.
When you convert your liquidity to variable rate lending, you will see a redemption fee.
Withdrawing your assets
To withdraw your assets, follow these steps:
Go to the portfolio holdings tab.
Expand the row of the asset you want to withdraw.
Click the withdraw button.
Enter the amount you want to withdraw.
Click submit.
Review details and click submit again.
Fees
Providing liquidity involves transaction fees on minting and redemption.
Minting fees
Minting fees are variable and depend on the volatility in Notional's fixed rate markets. If fixed rates have moved a lot in the last few hours, you will see high mint fees. Mint fees go to zero over time as fixed rates stop moving.
This encourages users to wait until fixed rates stabilize before providing liquidity. If you see high mint fees, it could be a good idea to wait and check back again in a few hours before providing liquidity.
NOTE - in special circumstances when utilization and fixed rates are very high, users may see a rebate instead of a fee. This is meant to encourage users to deposit and bring utilization down.
Redemption fees
Redemption fees are based on utilization. The higher the utilization of Notional's fixed rate markets, the larger the redemption fee will be.
Redemption fees are generally less than 0.1%. But in extreme scenarios where utilization is very high, redemption fees can get as high as 0.25% - 0.5%.
Liquidity risk
Providing liquidity can temporarily become unredeemable due to high utilization on Notional's fixed rate markets. In these scenarios, redemption fees are either very high or it can become impossible to redeem liquidity at all.
High utilization on Notional's fixed rate markets is caused by high demand to borrow at fixed rates. When this kind of demand occurs and fixed rate markets become highly utilized, the APY of providing liquidity and lending fixed becomes very high. High APYs help to attract additional liquidity and fixed rate lenders. This brings utilization down and makes liquidity redeemable again.
During periods of high utilization, it is best to wait until utilization stabilizes to try and redeem your assets in order to avoid paying high fees. If you are not comfortable taking this liquidity risk, consider other products like variable rate lending which does not have this risk.
IL risk
Providing liquidity can lead to impermanent loss as fixed interest rates move. When fixed interest rates go up, LPs will lose money. When fixed interest rates go down, LPs will make money.
The amount of IL is small because the fCash assets in fixed rate liquidity pools usually don't move that much in price terms. For example, here is how the price of USDC fixed rate liquidity changed between March and June 2024 on Arbitrum:
USDC fixed rates were highly volatile between March and April, but the nUSDC price never fell by more than 1%. That level of volatility is rare, and in general you should expect smoother price appreciation like LPs saw in May.
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