Created in 2020, https://www.notional.finance/ is a fixed-rate lending platform built on Ethereum. In this Episode, Teddy Woodward (Co-founder), explains the concepts of Notional’s Leveraged Vaults – a set of smart contracts that allow you to borrow from Notional’s fixed rate pools and then lend those borrowed assets out across various other variable rate strategies in the Defi space.
The idea here is that by being able to forecast your borrowing costs accurately, you can devise yield arbitrage strategies across the Defi space. (and then further loop and leverage those strategies if you have the risk appetite). Notional makes this easy and automatic with their managed leverage vaults. By doing this, they’ve been able to capture over 50 million in TVL.
Check out this episode, where we dive into the UI, go over the risks involved with doing this, and hear Teddy’s predictions on crypto and Defi for 2023 and beyond.
Audio Version of Notional Finance Podcast Episode
Moe episodes: Is Euler Changing the On-chain Lending Game
Transcript of Notional.Finance Episode
(Transcript is not perfect. It’s done using Descript’s ai transcripts)
[00:00:00] Hello and welcome to the Peer Through podcast where we peer through to what is next in tech and crypto. And today I have Teddy Woodward, who is the founder of Notional Finance. So Teddy, do you wanna start us off by giving you, giving us a bit of background on notional and yourself?
Uh, yeah, sure thing.
So, uh, first of all, Thanks for having me on the podcast. I’m happy to be here. Uh, and, uh, I am, yeah, I’m the co-founder of, of Notional. Uh, so Notional is a, uh, a fixed rate lending protocol, uh, built on Ethereum. Um, so if your, you know, if your, uh, listeners are familiar with, um, other sort of Defi protocols, it’s kind of similar to, you know, protocols like Compounder Ave, where you can.
Over collateralized against your crypto. Uh, [00:01:00] the, the major difference here on notional is that you can lock in fixed rates to lend and borrow. Um, so kind of the genesis of notional, uh, you know, we started the company, uh, me and my co-founder, um, uh, a few years ago. Uh, January of 2020 is when was when we started the company.
And like back then Defi was a very, very small space and, uh, You know, there are only a few protocols and, and all the sort of lending and borrowing options were all variable rate. And, um, we thought that, you know, defi was gonna be a big thing and that the kind of next logical sort of piece that was gonna be built, and, and that would be a big opportunity, uh, would be the ability to lend and borrow it at fixed rates.
Um, and so we started notional and. We’ve been going for a while now and, and currently, uh, we’re live with Notional [00:02:00] v2, um, which today has, um, roughly 55 million currently in T B L. Uh, we’ve, uh, uh, done about 700 million in loan volume, um, since the, uh, since notional V2 was deployed like 15 months ago. Um, yeah, so.
Yeah. And so that’s kind of, uh, notional in a nutshell.
Yeah. Yeah. No, that, that’s, that’s a good summary. And I guess I have to ask you, since you’ve been around, since I guess, launched, since like 2020, as you said, is your hypothesis that, um, was your hypothesis correct? Are you finding that people are really enjoying being able to calculate or depend upon a fixed rate when.
Yeah. So I would say like we are partially correct. Um, okay. And, uh, in the sense that Defi was like, for sure a big thing, we were definitely correct on [00:03:00] that. Sure. Um, and, uh, and I think, you know, it’s, it’s going to be a lot bigger than it is today. Um, but at the time, you know, when we started at, it was like before Defi summer, and uh, you know, there are a lot of people, like when we were going around looking for our sort of, , uh, investment round.
There are a lot of people that like, didn’t even think that, you know, that felt like Defi was kind of like a, like a little play thing, um mm-hmm. and like, it would, you know, it wasn’t a serious thing and it would never be that big. Um, so we were like right about that. Um, now with fixed rates, like I, I think that I, you know, I think that they do provide a lot of value.
Um, but like I will say that I was wrong about, , uh, like how quickly that value would be apparent and useful to people. So like, just to give you a little bit of context of what I mean there, um, I’m gonna talk mainly about [00:04:00] people that borrow on notional and borrow on other defi lending protocols. Okay. Um, so mainly today, or, you know, 99% of the reason that people borrow on on Defi.
Is to, uh, either, so they’ll, they’ll borrow stable coins against their crypto, um, against their crypto assets, like Ether rep Bitcoin, and then it allows them to buy more eth like to get levered long Sure. Without having to sell their crypto right, so they can like get extra long, right? Mm-hmm. , um, that is the number one reason that people borrow.
Sort of the second reason that people borrow is they, they borrow stablecoin against their crypto and then they go, you know, pursue risky investment strategies with those stablecoin to try and earn more yield than they’re paying on [00:05:00] their, on their loan. Right. Right. So those are like the top two reasons that people borrow, uh, in defi today.
And, and, uh, you know, what we realized after we, after we launched, Was that basically like if you’re just, if what you’re doing, if what you’re borrowing for is to go levered long, uh, fixing your rate isn’t actually that important because ultimately, like you’re, the outcome you have is like completely dependent on whether you got the market right And like, you know, the and, and ETH went up a hundred percent or if it went down like.
the difference in the interest rate that you pay on that loan is like just not that important if that’s what you’re borrowing to do. Right. Um, got it. And so what we found is that like, uh, uh, like we struggled to sort of get traction, like for that use case. Um, but [00:06:00] like we’ve sort of recently started getting a lot of traction for this other use case, um, which is basically like, Giving you leverage on defi yield strategies, right?
So you’ll, you’re able to on notional, uh, through a new product we launched called Leveraged Vaults, you are able to borrow from notional and, uh, deposit directly into a smart contract that executes a yield strategy. Okay? So, uh, okay. Uh, what we have live today and uh, is, uh, a vault that lets you borrow GE from not.
And deposit that e into a strategy that, uh, puts the eth into the wraps stick eth pool on balancer stakes, the LP tokens on a platform called Aura and Harvests incentives, uh, that that platform gives, uh, people who deposit their LP tokens. Um, so basically this leveraged [00:07:00] vault allows you to get like highly leveraged exposure to the returns of that strategy.
Because your margin is so much lower, right? Because maybe that strategy earns 8%. Um, the, like, being able to fix the rate where you borrow, uh, is actually like a really big value add because like, it significantly like de-risks, um, like this whole thing and allows you to, uh, you know, take that lever.
Without having to think about the risk of your borrowing cost increasing a lot because like you have so much less room for error, um, rather than when you’re just sort of going levered long on, on crypto prices. Yeah, yeah, no,
that, that makes total sense. Uh, I’ll get to the kind of the arbitrage borrowing.
Um, I’ve always kind of thought it was interesting the people who borrow stable coins and then go. Why they don’t just [00:08:00] do like, uh, perpetual or something like that instead, but I guess, I guess there are instruments or there are positions that you can’t take perpetual out on, like maybe borrow stable coins and buy an N F T and then the floor price goes up there or something.
Um, but in terms of the, so that makes sense to me that the, and that’s also almost binary, as you said. You’re really just trying to time the market and you kind of win or, or lose with that. , but when you’re doing the, the arbitrage of the various rates, that is a, a longer term strategy. And I can understand how a fixed borrowing rate is very important so that you know that you always have to execute a yield strategy above that rate.
Um, you mentioned that you have these kind of like leverage vaults that does all that for you. So in this smart contract, first I want to talk about the risk I would have because obviously it’s not just like, oh, I borrow it 5% and I get eight. So the risk is, um, that that balancer pool, well, you have a bunch of smart contract risk.
Hopefully those are [00:09:00] minimized. Um, but then is also the risk, like you mentioned, you’re getting Aura tokens. Like does your smart contract, when I go to claim, does it give me all of the various LP tokens that we were deposited in, or does it like instant sell and give me back, say the
ETH return. Right, right, right.
Okay. Um, yeah. And fir first of all, like. You picked it up right away. So like, go Jack. Cuz I was just thinking like, as I said that I was like, man, I like really went deep on the technical details, like immediately. Oh no, I’m all for it. Give you no warning . Um, yeah, yeah. But that, that’s exactly right. So, uh, your risk.
Uh, so, so first of all, like what the vault, what this vault does, um, is it’s gonna auto, auto sell those incentives for you. So, okay. It. It’ll, it’ll take the aura and the balance incentives, and on a weekly basis, uh, we’ll convert them to eth and reinvest them into the strategy for you. So, uh, [00:10:00] for you, all you have to do is, is make the decision, like, I want to borrow it, this, and I’m gonna take, you know, the yield that this strategy gives me.
Uh, and, and like all the actual implementation is like done for you. Right? Got it. So there’s no, no work you have to do. . But then, yeah, your risk, aside from smart contract risk is like, you know, that yield, the strategy is currently yielding 8%, but is that gonna last? Like, is it gonna go up? Is it gonna go down?
Like if it goes down below your borrow rate, then now it’s like you’re actually losing money. Right? But if it goes up, then you’re like, you know, you’re levered long the rate differential.
So, yeah. Yeah. No, that, that’s super interesting. So it’s definitely not like a year long set up and forget it. One, there’s variable rates on the platform, and two, if you’re earning in, in a small market cap token, like that token’s gonna go crazy all over the place.
And if you guys are auto selling it, [00:11:00] obviously it depends on what we get back. Yeah,
true, true. For sure. But I, I would like, uh, so we, so we like think about what kind of strategies we wanna list, kind of thinking about this and because like, uh, uh, So some of the things we consider are, you know, we, we aren’t gonna take a lot of smart contract risks, so we’re not gonna like, use like super new protocols.
Um Got it. And rules that where there’s not a lot of money in it. Uh, but also like something we think about is like we want to, uh, pick strategies that we believe are like,
Actually like producing like economic value. Like there’s a reason that they’re there and like there’s a reason that this yield is there. And so people can like, have some expectation that the yield is gonna be durable. Um, and like in this example, uh, the reason that that’s there, [00:12:00] uh, is because the, the Lido team has a vested interest in maintaining liquidity for the ETH and SSE teeth.
Like they need that to be liquid. And so if it, like, if the yield on that pool starts to like dip below sort of the eat staking rate, they’re in real trouble because then people will take money out of that pool and go stake it instead, and all of a sudden there’s no liquidity on the pair. And like, that’s like a huge problem for these, uh, liquid staking providers.
So there’s like a vested interest in making sure that that yield stays.
Yeah, that, that makes sense. Um, you know, I was trying to get liquid or steak teeth when they, when it kind of had that small deg not too long ago. I haven’t looked at what it’s at now. But also I’ve never really thought about that cuz I don’t lp the eth staked eat pair.
I just take the staking yield. So you’re saying essentially the [00:13:00] eth LP liquidity pair needs to be higher than just the staking yield because it’s a more risky position. So if it’s. Leidos gonna incentivize that.
Yeah, so Lido does incentivize it, uh, because Lido, uh, so, so Lido incentivize it with a Lido token on convex.
Um, and, and they like use the, uh, uh, I’m not sure who incentivizes it on, on balancer. Um, but it’s like not incentivized with the L d O token directly out balancer, but it is on. .
Okay. Interesting. Yeah, I’m sure it’s them on the back end and then they’re giving you balancer or something. Um, yeah. Have you ever thought about, so right now you guys and your team are, are the only ones making the automated strategies?
Uh, yeah. So, um, yes. So we have, so, uh, lemme see, uh, yes, that is true. So all, all the [00:14:00] leverage vaults are, are written by, . Um, and we, you know, a lot of people approached us to like, you know, cuz they, they think the leverage vault thing is cool and they want to do, you know, their strategy and, and they got this idea and that idea.
And, um, uh, so we have so far just like not, not really gone down the road of having external people build strategies and vaults. Um, and that’s like, and that comes down to smart contract. Sure, because like, uh, ultimately like, you know, uh, it’s notional user funds that are being borrowed and put into these strategies, right?
So it’s like if there’s a problem with strategy, uh, you know, like notional users are gonna get burned and like, we’re like kind of responsible for that, you know? So like, we are not like comfortable, like just kind of like letting other people, uh, write those things. [00:15:00]
No, that makes perfect sense cuz you know, someone comes along and is like, I got a 300 x yield strategy.
Yes. And then is there for like two days that looks bad on you guys. That makes sense. Um, well that’s all that, that all is good. And then I’ve also seen that you can lend, so you can provide liquidity and then you can lend and borrow against your end tokens, which, um, it seems like you can also lend and borrow against your C tokens, which.
Compound. So people are really stacking up these, I guess, these various yield farming strategies. They’re, they’re lending on compound and borrowing on, and then using that, those liquidity tokens to borrow end tokens, which they’re then lending with you guys and then they’re using an automated strategy.
Um, honestly, that’s, that’s, I get it, but it’s too much for me to keep track. Do you see a lot of people doing all.
Yeah, I, I, uh, honestly, it’s kind of, it can be a little bit too much for me too. So I, uh, [00:16:00] I, um,
was actually talking to, uh, you know, uh, I,
a user earlier this week, uh, who he said, you know, he got in touch with me.
Um, I’m not gonna say, but it’s like, it’s like a relatively larger, I don’t know, defi fund, I suppose. Sure. And. Uh, he’d gotten in touch with me because he’d been seeing me tweeting all this stuff about leverage, you know, these leverage vault yields and like, because like our, this leverage vault that, you know, we were talking about the ETH to raps d thing that has like returned massively.
So like people who have like been using that. So we launched that late last year. It’s been live maybe two, three months now. And like, like people have like been printing. Basically. Also another thing with the leverage vault is that when you get in, you get levered long steak deep, uh, because you’re like kind of buying some steak deep to put it into the pool.
Um, and so [00:17:00] like most of the users in that vault like got levered long steak deep at like 98 cents or 99 cents, and then the peg went to a dollar. And so like the realized APIs people have been getting has been like really good. And so I’ve been tweeting about. Yeah, yeah. I’ve been tweeting about this and like, this guy got in touch with me and, and he was telling me what he wanted to do was he wanted to lend U S D C on notional, borrow eth, uh, against the U S D C and then use the eth that he borrowed to go into the levered vault.
So he wanted to get like double leopard . Okay. Like the e strategy. And I was, I was just like, yo, man, I. I gotta be honest with you, that that sounds pretty risky. Like I, I, I, I’d love to onboard you, but like, you know, like full disclosure,
like, I wouldn’t do that. . Yeah. Yeah. I mean his, his choice. But we have definitely seen, uh, even massive firms get dis destroyed with all that sort of stuff.
So, um, [00:18:00] always be careful out there, Hey, I’ve never done this, but let’s give it a try. Um, I’m gonna see if this, oh man. Oh, I can share a Chrome tab.
I’m on your site right now for those who are watching on YouTube. Um, so we see the fix lend and borrow. Um, so it looks like you can lend and earn, which is probably pretty obvious to most people. You just lend out your, your E, your U S D C, your die, your rap, b t C, you can borrow. Same thing. Those are kind of one-way streets.
here’s the provide liquidity. So these are variable rates from what I can tell. Mm-hmm. . And you’re incentivizing them with your native token, which is note. And this liquidity, uh, this can go into the lending pools. Do you, you all kind of manage it? Is that kind of how that works?
Uh, so thi this liquidity goes into like the fixed rate lending and borrowing pools.
Um, and it’s, it’s like, uh, it’s managed by an amm. So, um, [00:19:00] it’s purely a. Got. Yeah. So it goes into the, and and like the liquidity providers, like are the ones that enable people to lend and borrow fixed. Yeah.
Got it. So it’s not so much a peer-to-peer matching of, of lending and borrowers. It’s more the liquidity providers are creating that.
Okay. And then I see stake, which is on the no token, but I don’t see the leverage vaults.
Where are those? Yeah, so, so they’re actually only on our beta site right now. So it’s like, it’s kind of a new product. You can go to the beta site if you want, though. It’s, uh, beta notional finance, uh,
not notional. Oh, wow.
Now we’re going into the web four, I guess the betas at web three. I like it. Okay. Uh, invest in Earn. Is this it
Waltz? Yeah. Oh, wow. .
Cool. And people can use this even though it’s a [00:20:00] beta site. This is
live money. Yep, yep. It’s, uh, it’s fully live. The, the reason we got it on the beta site is like the UI is still a little rough.
Uh, and, uh, we just wanted to like, you know, give people the expectation that it’s like, you know, this is the early stage thing and we’re still like, uh, uh, working through the kinks on the ui. Um, so they should just like, Um, that not everything works totally properly on the ui, but the contracts are safe.
Like we wouldn’t make it live if, if the smart contract level it wasn’t safe. Yeah. Got
it. Okay. I’m gonna need to break eye contact with the camera. So balancer, eth wa stick E. So I’m just trying to see how I would use this. Like if I wanted to deposit 10 E for three months, I would get a 6.5% a p. Oh, how much effort do you wanna take?
Oh wow. Okay. This might be too much for me on [00:21:00] this call.
You, yeah, yeah, for sure. For sure. But you need to pick a maturity. Pick a
maturity. Where is that? Maturity. Got it. Yeah, sorry, I was thinking, uh, how come it says 11 expected yield here yearly, and then this is 6.496.
Because you are borrowing at 6.496, so that rate right on the maturity card is that that’s your rate that you’re locking in to borrow.
Oh, and then I’m
expected to earn 11.3 or, yeah. All way. Yeah. Okay. So I’m essentially arbitration like a 5% interest rate difference. I hope I did my math right there. ,
uh, yeah, so, so you’re, you’re arbitrating a rate difference. Um, so you can see like the re the, like that return driver’s table or you know, that, that as well, it’ll show you the strategy return and, and like, so right now [00:22:00] the strategy return is like seven and a half percent.
So you’re borrowing at six and a half and then earning seven and a half. And so you’re making a 1% spread and then times the amount of leverage, right? So the more leverage you take, like. . Got it. Yeah.
Okay. And so is leverages essentially, you’re just looping it for me?
Uh, well, I mean, there, there isn’t looping, like, you can think of it like that if you want, but like, uh, it, like, so what, what’s gonna happen when you click the button is that you’re gonna put in 10, we’re gonna go borrow the rest.
So we’re gonna go borrow like 48th, or. And then we’re gonna take 50 ETH and we’re gonna just put it into this strategy. And then the assets in the strategy. So the ballot, the actual bouncer LP tokens are collateral against your 40 ETH [00:23:00] loan on notional. And notional can like liquidate you if the steak teeth eth liquid, uh, price goes down below your liquidation price.
Okay, cool. I get it. Um, that’s. So it is a lot of automation. Um, all right. I’ve never really just gone in and shared a screen for those who are just listening. That probably didn’t make as much sense. But the idea is, what, I guess for those who are listening and not viewing is it seems like you can do a lot of things that are one, um, guided by the notional team in terms of strategies, but also even if you came up with this own strategy, it would be a lot of clicks for you and using a lot of various platforms, and you created one smart contract that kind of handles the whole.
That’s right. Yeah. Cool. All right.
Um, anything else you wanna talk about? Any, anything coming down the pipeline for notion, the future of Defi, what anything you’re excited about? Just hit us with it.
Uh, yeah, I mean, I, so I’ll say like, stuff I’m excited about with, with notional and [00:24:00] then I guess, uh, I can talk a little bit about sort of broader defi.
Sure. Um, I, I think, uh, so, you know, there, there’s definitely a lot of stuff coming down the, the pipeline with notional. Like, uh, we’re revamping the entire ui. Um, like we’re, we’re actually right now we’re like, uh, got the prototype builds for the new UI and, and we’re gonna do some user testing next week.
I’m really excited about how the way that’s turning out. We’ve, we’ve like, uh, gotten a bunch of feedback on the leverage volume ui and we’re. Introduce some like, awesome changes there. So I’m like really excited on the UI side where we’ve got more leverage vaults coming, so we’re gonna have uh, more sort of e liquid staking stuff and then also some stablecoin vaults.
So you’re gonna be able to do, get leveraged stablecoin yield, um, that like, that’s awesome. And then we’re also like, like launching, uh, like a big protocol upgrade, um, probably in the next three to [00:25:00] four months, which is. Gonna take notional to the next level and do like, awesome, cool stuff, like even beyond what we’re talking about here, um, which I’m really excited about.
Uh, and that’s, I guess that’s notional. And then, um, just for sort of broader defi, um,
wait, before you get into broader defi, are you allowed to talk about, uh, some of the things that are going, gonna bring notional to the next level? Or is that proprietary?
Yeah. Yeah. It’s like, it’s, it’s still, it’s still a little hush hush, uh, okay.
Um, yeah, I, we, we can’t, like, I can’t, you know, say, say details just yet, but, uh, but I think it’s gonna be like, really big. So I’m, I’m very excited and looking forward to getting all that stuff live and, you know, and we’re, it’s like a lot of work. Um, but, uh, but I think it’s gonna be awesome. So I, I’m, I’m, anyway, I’m excited about that.
Um, and then, , I guess like
Uh, I [00:26:00] am looking forward to. So I think that there are a lot of, uh, um, you know, people talk about like, when are the institutions coming, right? And like, in the context of defi, I think about like, you know, there they’re, they’re these, uh, these institutional. You can call ’em institutions, crypto hedge funds, whatever, um, that most of them in the past cycle, like were using like CFI lending products, like they’re like lending and borrowing from Genesis and they were using centralized exchanges and just all this CFI infrastructure.
And what I’m excited about coming, going forward is like all that stuff. Like, or at least the CFI lending space, like that’s pretty much like all gone, right? Yeah. There’s like, there’s Galaxy is like the only one left and I’m looking forward to is what I hope will happen and is, is that these [00:27:00] guys are gonna like, have to actually get their hands dirty and like start using Defi, uh, because they don’t have any other.
Um, so like, that’s like, that’s what I’m excited about. And, and I think that, you know, that that would just be a huge, a boon to the space. Um, and, uh, yeah, that’s, that’s one thing I’m excited about anyway. Yeah, cuz I, I think it’s sort of like, it, it’s, it’s like a forcing function. The fact that like the alternatives are just now completely gone.
Like, I have no other option. And so it’s like a, a like something that’ll, I think really. sort of progress. Yeah.
Yeah. So you mean like all these funds that were exposed to FTX and all that, that that got in trouble, uh, you think rather than them just, you know, maybe holding Ethan a ledger, they’re going to put their larger funds into de the defi ecosystem?
I, yeah, I think
so. Yeah. Yeah. I, cuz
I, I think that’s a good hypothesis. [00:28:00]
Yeah. Because I think specifically, like for like borrowers, you know, it. There’s a reason they borrowed in the first place and uh, they’re gonna wanna do it again. You know, maybe they don’t wanna do it now. Well, maybe they wanna do it now, but like, you know, at least recently the market’s been going down.
Right. I know. We’ve been coming up, oh, and I suppose people will hear this maybe a little bit later, but I’m, I’m speaking in early February when the market has recently started to trend up and like this is about the time when people start liking to borrow against their crypto and like getting a little extra leverage.
And so like these people will still want to do that, but like they won’t have any other option than defi. And so I think you’ll start to see like more of these institutional types, like start really digging in and like actually using defi, which I think, yeah, no, I,
I agree with that. I think that’s cool. I never really thought about it that way.
There are, um, a lot of silver linings that. all this [00:29:00] shit that went down and one of which is, is kind of this slow death of, or maybe fast death of centralized exchanges and lending, lending protocols. Um, cuz Defi and Crypto was all about, you know, your, your keys, your coins, giving you the mm-hmm. , the ability to do that.
And we kind of instead just threw everything into a, a, another centralized vault, but, That’s good. And, and I guess something that would be nice to kind of close on is for anyone who is listening, like, from what I can tell, uh, you know, not completely vouching for you guys, but it seems like while they talk about these lending vaults and these managed services, it’s completely based on a smart contract.
Um, everything is transparent on the blockchain. You guys don’t ever have control of anyone else’s funds. The strategy itself could fail, um, but you guys aren’t actually custodying funds. Deploying them in your own strategy, like in the way say Celsius was. Um, so it’s a totally different thing. I guess I just wanted to clarify that.[00:30:00]
That that is absolutely right. Yeah.
Cool. Um, any last words? Where can people go to try notional Finance or learn more about you or any of that good stuff? Uh,
yeah, so, uh, the website is notional.finance and, uh, you can follow along on Twitter is probably the best way. You can follow the company or the protocol at Notional Finance is the Twitter handle and me, um, I am at Teddy Woodward.
thank you so much, Teddy Woodward for coming on the show. Uh, it was insightful. I think it’s really cool what you guys are building, particularly all the automation. Um, I appreciate it.
Thanks a lot, man. I appreciate it and, and, uh, it was a good time.