Yield earning (v1)

This doc talks a lot about the nomenclature of Cash and fCash to understand the core concepts at ease but from a protocol's perspective, Cash is nothing but cTokens and fCash is the +ve fCash representing the claims.

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.

Context: fCash Use-case

Yield Sources

Interest accrual from cTokens

Since Cash is the underlying cTokens and cTokens accrue interest, liquidity providers would be earning yields from the Cash they put up as liquidity.

Trading Fees

Like other automated market makers (AMMs), LPs earn trading fees (liquidity fee in the case of Notional). Returns on the Notional AMM are driven to a large extent by trading volume, total liquidity in the pool, and the fees charged on trading.

Higher trades = High liquidity fee = Better yield for Liquidity Providers.

Net Lending - Borrowing Position P&L

if the fCash ratio in the pool is lower than 0.49, when the user redeems their tokens they will receive greater than 100 DAI (initial deposit) and less than 96.078 +ve fCash (initial deposit). This would create a net borrowing position (obligation) in a user's portfolio because -ve fCash > +ve fCash in their portfolio.

Similarly, with the same logic, if the fCash ratio in the pool is greater than 0.49, it would create a net lending position in a user's portfolio because -ve fCash > +ve fCash in their portfolio.

Context: Liquidity provider's portfolio

The exchange rate between fCash to Cash approaches to 1 (1 fCash = 1 Cash) as we approach the maturity date. The trades happening in the Notional AMM would likely impact this exchange rate by altering the fCash proportion but the intensity of the change in exchange rates drops as we approach maturity.

Context: Valuing fCash

A liquidity provider with a net positive fCash position (Lending position) will consistently make money over time if nothing happens because the value of their +ve fCash will gradually increase. Conversely, a liquidity provider with a net negative fCash position will consistently lose money over time for the same reason.

The above is subject to the change in pool proportion thus ultimately dependent upon the trades happening in the liquidity pool.