Collateral structure & leverage

Leveraged vaults are whitelisted smart contracts external to the Notional system that execute pre-determined strategies under specific risk constraints. Leveraged vaults may execute Notional-specific strategies or strategies that involve interacting with one or more external protocols like Curve, Balancer, or Uniswap.

The purpose of leveraged vaults is to allow users to get leveraged exposure to the returns of a particular strategy. Notional achieves this by recognizing the assets in a leveraged vault as collateral against the user's debt.

Learn more about leveraged vaults here.

Leveraged Vault Collateral Structure

Leveraged vaults allow Notional users to borrow an amount in excess of their deposit to enter a whitelisted strategy. To allow for this, each leveraged vault has its own collateral structure. For example, a user could deposit 1 ETH and borrow 5 ETH from Notional to enter the Balancer wstETH/ETH pool with 6 ETH. To ensure the protocol is overcollateralized at all times, the borrower can't withdraw the borrowed ETH and can only use it to enter the specific leveraged vault strategy.

If an account's vault shares decrease in value and breach the vault's minimum collateral ratio, then the account's leveraged vault position becomes eligible for liquidation.


Vault shares value can decrease over time. For example, a strategy LPing in a wstETH/ETH pool would be subject to moves in the wstETH/ETH exchange rate.

Minimum Collateral Ratio (Maximum Leverage)

The minimum collateral ratio parameter enforces the maximum amount of leverage users can take. If a user's collateral ratio is lower than the vault's minimum collateral ratio, the account will become eligible for liquidation.

The minimum collateral ratio protects the protocol against a rapid decline in the value of vault shares. The protocol's protection is equal to the minimum collateral ratio minus the discount given to liquidators. For example, suppose a Vault's minimum collateral ratio is 10%, and the liquidation discount given to liquidators is 2%. In that case, the protocol is effectively protected against an 8% decline in the value of vault shares after an account has breached its minimum collateral ratio requirement.

An account's collateral ratio can be calculated using the following formula:

collateralRatio=vaultShareBalancevaultShareValuedebtdebtcollateralRatio = \frac{vaultShareBalance * vaultShareValue - debt} { debt}

For example, consider the following account:

  • BPT balance: 1,000

  • Value of one BPT: 1.00 ETH

  • stETH/WETH exchange rate: 1.0

  • fETH debt: -900

  • Maximum leverage ratio: 0.08 (12.5 X leverage)

  • Vault shares balance: 1,000

The value of a vault share at any point in time can be calculated using the following formula:

vaultShareValue=BPTbalanceBPTvalueInEth+incentivesValueInEthvaultSharesBalancevaultShareValue = \frac {BPTbalance * BPTvalueInEth + incentivesValueInEth} {vaultSharesBalance}
vaultShareValue=1,0001.00+21,000vaultShareValue =\frac{1,000 * 1.00+2} {1,000}
accountVaultShareValue=1,002EthaccountVaultShareValue = 1,002 Eth
collateralRatio=1,002900900collateralRatio = \frac{1,002 - 900}{900}
leverageRatio=0.113(8.82Xleverage)leverageRatio = 0.113(8.82 Xleverage)

Let's recalculate the account's leverage ratio assuming the stETH / ETH exchange rate decreased to 0.95. The change in the value of a BPT is non-linear when compared to the stETH/ETH exchange rate since it is a function of the pool's structure and a function of the magnitude of the exchange rate change. A decrease from 1.00 to 0.95 in the stETH / ETH exchange rate would imply a new BTP price of 0.965 ETH.

accountVaultShareValue=965EthaccountVaultShareValue = 965 Eth
leverageRatio=0.072(13.85Xleverage)leverageRatio = 0.072(13.85 Xleverage)

The ending leverage ratio has now breached the maximum leverage ratio. The account is therefore eligible for liquidation.

Parameter selection considerations

When selecting a vault's minimum collateral ratio Notional's governance should consider the following factors:

  • The historical Vault Shares maximum drawdown;

  • The strategy's liquidity (ex: slippage to exit a liquidity pool)

  • Qualitative risks (ex: LP concentration risk)

Maximum Collateral Ratio (Minimum Leverage)

Each vault also enforces a maximum collateral ratio. This parameter dictates the minimum amount of leverage an account has to take when entering the vault. This limits potential users trying to enter the vault without borrowing a substantial amount from Notional. Without this parameter, users could deposit their funds in a given strategy through Notional and only borrow a small amount from the system.

Minimum borrow size

Each vault has a minimum borrow size parameter that enforces the minimum amount an account needs to borrow to enter a leveraged vault. For example, if a vault's minimum borrow size is 5 ETH then the user will need to deposit an amount that allows him to borrow at least 5 ETH from Notional when entering the vault.

Parameter selection considerations

The minimum borrow size should ensure that accounts are large enough for liquidators to liquidate an account that breaches its collateral requirements profitably.

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