fCash Use-case

fCash lets you easily and safely agree to send or receive money at certain dates in the future. By trading fCash, you can move your money around in time as you wish.

Positive fCash is a coupon to claim the principal + interest and it is usually held by a lender (one who invests in the bonds).

Negative fCash is an obligation to pay back to the lender (investor). It is usually held by a borrower.

Context: What & Why fCash?

Using fCash as a Lender

When you make a lending trade, you'll exchange your capital with a counterparty and in return, you'll receive a fixed amount of that same currency at a specific point in the future, along with the agreed-upon interest rate.

This future representation of currency is nothing but positive fCash tokens that a lender would receive in exchange for their capital.

At Notional, we make it easy for you to lend and borrow in cTokens (Compound tokens), which are simply yield-bearing derivative tokens that represent your capital. When you lend your currency through Notional, your capital is stored as cTokens, and we provide those cTokens to borrowers.

To calculate the amount of fCash you'll receive for your lending, simply use the following discounting formula:

$fCash = Cash* e^{(lastImpliedRate * TimeToMaturity) }$

Here the TimeToMaturity is in a fraction of a year (e.g. 6 months = 0.5, 3 months = 0.25)

lastImpliedRate is this the interest rate that the last user traded at minus the liquidity fee. It is used to determine the next user's interest rate.

A walkthrough example

If you wish to lend 100 USDC (cash) at an lastImpliedRate of 5% for 1 year at a 0.03% liquidity fee, you would get 105.095 fCash.

lastImpliedRate = 0.05 - 0.003 = 0.047 TimeToMaturity = 1 (1 yr) Cash = 100 USDC fCash = 100 * e^(0.047 * 1) = 104.81

Here the present value of 104.81 fCash is worth 100 USDC at the time of deposit. As we approach the maturity date, the value of that fCash will approach 104.81 USDC.

Once your trade has been executed, you can rest assured that your interest rate is fixed and that we guarantee your fCash position will be honored at maturity.

We want to make sure our lenders have flexibility as well, which is why you can withdraw your positions at any time. However, in the event of an early withdrawal, the annual percentage yield (APY) you receive may differ from the APY promised at maturity. The realized APY will depend on the current interest rate and the time left until maturity.

Using fCash as a Borrower

Similar to a bond issuer, a borrower can mint positive fCash and negative fCash tokens based on the supplied collateral, collateral ratio, and the amount that the borrower wishes to borrow. The newly minted positive fCash token is swapped for cTokens. At the end of the borrowing trade, the borrower ends up with the amount they want to borrow denominated in cTokens, negative fCash (obligation to pay at maturity) tokens equivalent to the borrowed amount (cTokens). Borrowing is as simple as issuing bonds. When a borrower wants to take out a loan, they can mint positive fCash and negative fCash tokens, which are based on the collateral they provide, the collateral ratio, and the amount they wish to borrow.

Once the positive fCash token is minted, it's swapped for cTokens, which represents the borrowed amount desired by the borrower. At the end of the trade, the borrower receives the cTokens equivalent to the dollar amount they want to borrow. They are also left with the negative fCash tokens minted along with the positive fCash tokens, which represent their obligation to pay back the loan at maturity.

A walkthrough example

If a user wants to borrow USDC against their ETH (priced at $2000), with a minimum Loan to Value of 70% a user can borrow up to $1400 worth of USDC. Let's say you want to borrow $1000 worth of USDC for one year. Assuming the interest rate to be 5% plus a 0.3% liquidity fee (Since you're borrowing, the fee gets added on instead of subtracted as it would be with lending).

To make the trade, you can deposit 1 ETH as collateral and mint $1000 worth of positive fCash tokens, as well as the same amount of negative fCash tokens. You can then swap your $1000 worth of positive fCash tokens to get the $1000 worth of desired capital as a loan.

Here is how you can compute how many fCash tokens will be minted if you were to borrow $1000 with the above-discussed specifications:

lastImpliedRate = 0.05 + 0.003 = 0.053 TimeToMaturity = 1 (1 yr) Borrow = 1000 USDC fCash = 1000 * e^(0.053 * 1) = 1054.429

Your portfolio would look something like this:

Cash = 1000 USDC worth of cUSDC Liability = 1054.429 negative fCash tokens Collateral: 1 ETH price at $2000 LTV ratio = (1000 * Price of USDC)/(1 * Price of ETH) = 50%

At the time of computing fCash quantity for a lending trade, the liquidity fee is subtracted from the current rate and then the amount lent is discounted based on the time to maturity.

At the time of computing fCash quantity for a borrowing trade, the liquidity fee is added to the current rate and then the amount to be borrowed is discounted based on the time to maturity.