Free Collateral Computations

Currently, Notional is supporting 4 currencies with the following maturities:

	3 Month	6 Month	1 Year
DAI	Yes	Yes	Yes
USDC	Yes	Yes	Yes
ETH	Yes	Yes	No
WBTC	Yes	Yes	No

In any given conditions, a user's portfolio might consist of a combination of +fCash, -fCash, Cash, and nTokens subjected to multiple assets. Here is a table that shows the user position w.r.t their asset holdings:

Position	+fCash	-fCash	Cash	nToken	Remarks
Lender	Yes	No	No	No	Net Positive
Borrower	Yes / No	Yes	Yes / No	Yes / No	Net Negative*
LP	No	No	No	Yes	Net Positive
nToken	Yes	Yes	Yes	No	Net Positive

For a +fCash holder (lender), they are holding a claim to the funds in the future thus it is considered net positive (+) in the free collateral calculation.

Similarly, an LP is a net positive because the value of nTokens is always positive. The nToken account holds a combination of +fCash, -fCash, and Cash where -fCash will never exceed the value of +fCash and the Cash.

An -fCash holder (borrower) may also hold Cash, +fCash or nTokens in their portfolio to overcollateralize their borrowing position, but the debt itself is considered a negative (-) in the free collateral calculation.

In the computation of free collateral, net negative values are considered debts and thus debt buffers are applied, which increase the debt value in the calculation of free collateral. Net positive values are considered as collateral and thus, collateral haircuts are applied which decreases the collateral value in the calculation of free collateral. The haircuts and buffers are applied on a per-asset basis depending on the asset's risk profile.

Cash

No haircuts or buffers are applied to cash positions as they are always directly redeemable for the underlying position and are not considered risky.

fCash

If a user is holding fCash (may it be positive or negative) the value of that fCash needs to get converted to Cash during the collateral calculation. For example, we need to value fDAI in terms of DAI. To compute the value of fDAI in terms of DAI we need to discount fDAI based on time left to maturity and its current interest rate. The protocol applies a buffer to the interest rate for negative fCash positions and a haircut to the interest rate for positive fCash positions. That way the protocol takes into account the interest rate risk of fCash positions.

If we are valuing +fDAI to DAI the interest rate haircut would be added to the current interest rate, thus reducing the present value of +fDAI (collateral value) lower than it actually is. While valuing -fDAI the rate at which the discounting happens is increased by the buffer amount thus, the present value of -fDAI (debt value) comes out greater than it is during the collateral calculation.

nToken

As the table suggests, nToken is a portfolio token of a mixture of +fCash, -fCash, and Cash for different maturity pools of underlying assets.

The +fCash & -fCash are converted and adjusted such that their values are denominated in Cash and are summed up to get the present value of nTokens which is further adjusted with a collateral haircut. This haircut makes the protocol take into account the risk of nTokens during the collateral calculation.

Free collateral

Once the adjusted present values of fCash (if any) and nTokens (if any) are derived they are summed with the Cash holdings (if any) for each currency. This per currency net risk adjusted value is then re-adjusted based on it being a debt (net negative) or collateral (net positive) and finally converted in terms of ETH. This final adjustment buffers (increases) the value of debts and haircuts (decreases) the value of collateral assets for collateral purposes. These buffers and haircuts protect the protocol against exchange rate volatility.

Appendix

1

1.1

1.1.1

1.1.1.a

1.1.1.b

1.1.2

1.1.2.a

1.2