nToken return drivers

nTokens earn returns in four ways:

• Blended interest rate: Interest earned from cTokens and fCash held by the nToken account either directly or through its liquidity token positions. An nToken's blended interest rate is the weighted average of the interest rates earned on the nToken account's cToken and fCash balances. Thus the nToken blended interest rate varies when cToken or fCash yields change and when the nToken claims on cTokens and fCash assets change. It is important to note that the nToken blended interest rate can be negative if the nToken holds a negative fCash position and the cToken supply rate is lower than the fCash rates. This is because the nToken account would effectively be borrowing at a higher rate than it would earn on its cTokens. Find a detailed example on solving for the nToken's blended interest rate here.

• Liquidity Fees: Fees earned from the liquidity tokens held in the nToken account any time a user borrows or lends on one of Notional’s liquidity pools. Half of these fees flow to the nToken account via its liquidity token holdings while the other half is added to the protocol's reserves. This fee is currently set at 50 basis points on the annualized interest rate of the user’s loan. Lots of lending and borrowing activity can generate significant fees for nToken holders. The impact of liquidity fees on the nToken return depends on the amount of trading volume and the amount of liquidity sitting in the nToken account.

• Impermanent loss: Loss from the nToken account's liquidity token holdings when pool exchange rates vary. When the nToken account provides liquidity to a pool and the exchange rate from that pool changes unidirectionally liquidity tokens are exposed to impermanent loss. The larger the exchange rate move is, the bigger the impermanent loss. In practice, an nToken's potential for impermanent loss is small because fCash exchange rates are relatively stable.

• NOTE Incentives: nToken holders are directly incentivized to mint and hold nTokens with Notional’s governance token, the NOTE. nToken holders accrue NOTE rewards proportional to their share of the total nTokens in that currency. NOTE incentives are not subject to any lockup or vesting period. Find more information about NOTE tokens here.

Given the qualitative difference between liquidity fees and interest earned on cTokens and fCash, we can think about nToken returns as the sum of a directly observable blended interest rate, liquidity fees, impermanent loss and NOTE incentives.