Congrats on a very nice proposal. What’s the approximate gross profit margin taking into account only streaming fee income and gas costs, ie, ignoring LMI? With only a 0.49% fee I would expect the profitability to be low or even negative. I appreciate that minting instead of swapping will help control the rebalancing gas costs.
Hey Joseph - great question around the product’s profitability. We’re still hammering out the finer details of the rebalancing (which will incur the largest share of gas fees), but the goal is to minimize rebalancing as much as possible so that the general operational costs for these products are low. One nuance working in our favor is that fCash positions automatically convert to cTokens at maturity so there isn’t an intermediary trade required to, say, convert a fUSDC 3mo position at maturity into cUSDC before we can purchase the next batch of fUSDC positions.
There’s a lot of backtesting ahead of us to determine what the lowest streaming fee can be at a conservative AUM level with rolling maturities and gas fees factored in. Personally, I’ve had to reframe how I think about streaming fees a bit for this type of product. For example a 0.95% streaming fee is more than reasonable for a composite index that can return +50% in a year, but that same 0.95% streaming fee applied to this type of product returning a predictable ~9% a year would amount to a much larger hair cut for customers (~10% of their return vs ~2% for a composite index). I’m ignoring the fact that the streaming fee is - well - constantly streaming throughout the year and not collected at a single point in time, but the concept still generally applies. That said, I do believe we can strike a balance between cost to the customer and profit for the Coop, it’s just a matter of doing the modeling!
Another aspect to consider is that our pod is operating as the methodologist for this suite, so a larger share of gross revenue will make its way to the community coffers compared to previous fee splits with external methodologists.
Thanks both. I’ll look forward to the profit calculation.
This seems like a promising product. I could definitely see this being a great product to encourage DAOs to diversify their treasuries into as part of a risk management strategy. It could help DAOs reduce reliance on their own token, while earning a better yield than holding stablecoins. It is also helpful to have a product that may perform better in a bear market compared to current Index products. Excited to keep an eye on this
(Disclaimer: copper owl quest post)
I would buy this on day 1!
Looking forward to seeing how this pans out (along with $JPG).
This component sounds excellent, a product that is a key fit in the portfolio. Reaching and educating DAO treasuries is a heavy lift. What kind of support is going to be needed to engage this audience? (this may be more of a question for the Growth Nest).
This is an amazing capability that Notional has built. At the moment, it looks like Notional is limited to USDC, DAI, ETH, and WBTC. FEI as a stablecoin has an interesting model that might add decentralized credibility with growing market interest. Additionally, I do see value in partnering with teams like FEI to help reach hard to convince customers like DAO treasuries. @twoodward; does Notional have the ability / capacity to add in other early stablecoins to your solution set so it may be included in the the $FIXED portfolio in the future?
Yes sir! Notional can and will list other stablecoins to lend and borrow. Stay tuned @shawn16400
If anyone would like to understand the “why” behind this product suite in more detail, I’ve published an article that breaks down the broader need in DeFi for bond products.
Hey shawn - another great question. There are quite a few products coming down the pipeline that may appeal to DAOs (ex. PAY, FIXED, REAL) and it will absolutely take a concerted effort on the part of the Coop to engage and educate these customers on what these products could do for their treasuries.
@Mringz is in a better position to comment on this, but BD and Growth will play a critical role in the success of all these products. I see a future where we engage different DAOs with a consolidated catalog of yield-bearing products along the risk spectrum, but that’s not necessarily my domain .
Regardless, we will need a strong distribution strategy for this suite, especially if we decide to launch without a branding or distribution partner. More to come on this, would welcome your feedback in the future too!
Great proposal. This is a much-needed product within the DeFi ecosystem.
Really excited for this concept!
I’ve a bit of a concern though, about having the entire fixed income allocation of the Index on only one fixed rate platform, and only one stable asset. I feel like there would be much more value in an Index that really diversified exposure to both the underlying stablecoins and fixed rate products.
Would you be open to discussing the addition of other fixed income platforms and/or assets? These are some fine candidates:
- Tempus Finance
- Element Finance
- Pendle FInance
This would also open up diversification options to other assets like DAI, alUSD, LUSD, etc.
Hey @LazyMicrobe - You’re right that there’s a larger opportunity to branch out across different assets and underlying protocols! This proposal actually represents a suite of stable yield products, and the first product we would like to launch within the suite would be the short-term USDC product. That said, the same core strategy can be applied to other underlying assets and various maturities to accommodate customer preferences related to risk and diversification. Here’s an excerpt from the “Rationale” section of the proposal:
The benefit of a suite of products is that the same infrastructure and methodology can be applied to multiple products that differ in terms of maturity, investor preferences, and underlying assets. The follow list of potential products demonstrates this extensibility and is limited to assets supported by Notional v2 today:
- USDC Short Term (<6 Month Maturity)
- USDC Long Term (<12 Month Maturity)
- DAI Short Term (<6 Month Maturity)
- DAI Long Term (<12 Month Maturity)
- wBTC Short Term (<6 Month Maturity)
- wBTC Long Term (<12 Month Maturity)
- ETH Short Term (<6 Month Maturity)
- ETH Long Term (<12 Month Maturity)
Blended products (i.e. Diversified Stablecoin Index, ETH + BTC Index) are also possible in the event that investors want exposure to more than one stablecoin or blue chip asset. Notional will also be expanding available assets on their platform in the first half of 2022 so additional stablecoins and tokens can be considered in the future. More holistically, by building these stable, income-generating tokens, we enable the creation of meta balanced portfolio products and target date funds in the future.
In terms of protocols, Notional is our preferred partner for this suite because of their commitment to security, their success in the fixed-rate space, and the exceptional support their team has provided thus far. There are also many exciting developments on Notional’s roadmap that will allow us to support more assets and access additional lending markets. We will definitely be keeping a close eye on the space, but Notional is the preferred protocol for this suite of products!
Understood, thanks for your answer! Just wanted to make that point: Treasury management initiatives in conservative DAOs who seek fixed rates are also likely to want to diversify their smart contract risk and financial risk exposure among different options (e.g. Notional does lending markets, Element does yield-split of an underlying yield position, etc. etc.). If that is not the purpose of this specific product at this point in time, that’s fine as well!
In any case, the fixed rates market has an enormous growth potential and I’m stoked to see this kind of product being developed. Would love to participate in talks for any future developments in this regard!
Great concept to build market share of fixed income products. I had 10yrs+ of Bond ETF experience and I cannot agree more about the growth of this space. (Witness the actual adoption by new users).
One of the key questions for most users before they comfortably allocate their $ to bond ETFs to earn income is to weight in the default risk of underlying assets vs potential Income or yield.
E.g. Following Traditional bonds market, it ranges from lowest risk (US Gov’t or Sovereign bonds, to Credit bonds to Junk or High Yield bond). investors were trained to earn low 0 to 3 % for almost risk free asset to 10%+ for Junk bond asset.
I would like to know more about the potential Default Risk of holding any of the underlying Short duration Stable coins tokens.
I am very excited to help and contribute to make this one as successful as what we have witnessed in the growth of Bond ETFs in the past 10yrs.
Lenders on Notional face two risks:
- Smart contract risk. This is the primary risk - the risk that the protocol gets hacked and loses user funds. Notional takes security extremely seriously and has taken every possible measure to ensure that this won’t happen to the protocol’s users. Notional has been audited by three independent auditors, and has also been formally verified. Additionally, we offer a $1M bug bounty for critical vulnerabilities.
Notional has never been hacked, but this is a risk inherent in using DeFi products and is at some level unavoidable. That being said, we do everything that can be done to minimize this risk. And users can also purchase smart contract insurance via Nexus Mutual if they are still worried.
- Economic risk. This is the risk that a borrower defaults on their debt. Notional protects against this risk via overcollateralization. Our model is very similar to Compound or Aave in this way. We require borrowers to put up high-quality, liquid collateral against their debt. If the value of that collateral falls below a minimum threshold, their collateral can be liquidated and their debt position closed out. The risk here is that the market falls too quickly for Notional’s liquidators to do their job and borrowers end up insolvent. This has never happened, and we set collateralization parameters very conservatively such that we are very confident that it will never happen. However in the event that it does happen, Notional maintains a reserve fund that will cover the insolvency and make users whole.
@twoodward . thanks for addressing some of the key risks area.
May I please follow up with additional risk involving between cDAI vs DAI or cUSDC vs USDC? I am thinking out loud how to minimize this pair of currency fluctuation in order to minimize any offset to the interest income earn.
Thinking of Local Emerging Market Debt as an example, investors can earn over 10% yield on EM Debt denominated in Local currency (e.g. India Rupee). If India Rupee fell against the investment currency (e.g. USD) by 10% during the investment period, the overall income will be washed out.
Is there any way to minimize the cToken’s fluctuation vs USDC or DAI during investment period so investors can lock up the actual yield?
Hi @Achan . I understand your point, but the comparison is not really apt in this context. cUSDC is not a different currency than USDC per se, it is a wrapped version of USDC that earns interest. The amount of USDC per 1 cUSDC increases monotonically with time, by construction. You can find more info about cTokens here: Compound | Docs - cTokens
would the exchange rate between cUSDC / USDC depreciate in value if the value of cToken will only earn or accumulate interest from underlying token?
If so, would you mind if you can walk me with a detailed example how a lender earn their yield assuming three scenario
- cUSDC/USDC or cDAI/DAI- exchange rate unchanged between Prior maturity to At Maturity
- cUSDC/USDC or cDAI/DAI appreciated 10% Prior maturity to At Maturity
- cUSDC/USDC or cDAI/DAI depreciated 10% Prior maturity to At Maturity
It helps me understand more about the risk of Index product which holds Fixed Rate product from Notional.
Hey @Achan it is not possible for the cUSDC/USDC exchange rate to depreciate. The Compound system is constructed such that the cToken/token exchange rates can only increase with time.
So I think that the illustration you pulled from Notional’s documentation steps through an example of the only potential scenario (cToken exchange rates increasing with time). If you have further questions on this, would you like to take them off this forum? If so, please feel free to jump in Notional’s discord and we can answer them there!
Having said all that, what could potentially happen is that Compound gets hacked and its USDC gets drained. That is a risk inherent to using Notional. So Notional users take the risk of Notional’s smart contracts as well as Compound’s smart contracts.