Lender Trade 2

This is for you, anon Lender

This is literally the only 🧵 you would ever need to understand everything about lending on Notional and how you can strategize your position to get maximum.

(This also includes getting more APY than the fixed rates promised)

PART 2

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If you hold your positions till maturity, you would get the rates you were promised (considering no fees).

BUT

fCash valuation takes interest rates, and the days to maturity into consideration and the resulting APY would get impacted for the same reasons if you exit early.

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We would go over scenarios to understand how is APY get impacted when exiting early.

🔹 1. A scenario where Exit time is varied keeping the Exit rate constant

🔹 2. A scenario where Exit interest rates are varied keeping the Exit time to be constant Lets us check how APY changes with time to maturity:

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Scenario 1a: You hold your position of a fCash maturing in 1 year from now only for 1 month assuming the rate to be constant.

Entry Parameters: Interest Rate 5% Time to Maturity 365 Days Position held for 1 Month (30 Days)

Exit Parameters: Interest Rate 5% Time to Maturity 335 Days

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Note that the APY is -ve thus you realized a loss of -0.16 Cash. This occurs because the user didn't wait to get the liquidity fee (3%) recovered.

Keeping everything the same as above, how long should a lender hold their position to recover the fees?

The tool is capable to provide this information:

It says if you hold the position for 41.32 days you would be at break even.

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Here is how the Interest accrued and supply APY change based on varying time to maturity:

Days to Maturity vs APY provide the best visualization of how the APY approaches the promised APY as time to maturity approaches to zero.

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We now know how time to maturity impacts supply APY realized by a lender considering a liquidity fee of 0.3%.

Let us understand how the interest rate at the time of exiting impacts the supply APY.

Here are two scenarios when interest rates are greater or less than the interest rate at the time of investing:

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Scenario 2a: Interest rates at the time of exit are greater than the interest rates at the time of deposit.

Here the rates increased as more and more people borrowed funds by putting in fCash and taking Cash from the liquidity pool. This would make fCash cheaper.

Thus when you exit, your fCash would swap for less Cash compared to a scenario when interest rates at Entry and Exit were the same.

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Scenario 2b: Interest rates at the time of exit are lesser than the interest rates at the time of deposit.

Here the rates decreased as more and more people lent funds by putting in Cash and taking fCash from the liquidity pool. This would make fCash expensive.

Thus when you exit, your fCash would swap for more Cash compared to a scenario when interest rates at Entry and Exit were the same.

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Here is what the APY looks like if we change the exit interest rates:

Entry Parameters: Interest Rate 5% Time to Maturity 365 Days Position held for 6 Months (183 Days)

Exit Parameters: Interest Rate variable Time to Maturity 182 Days

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If we combine both concepts and change the exit parameters to: Time to Maturity 0 Days

The impact of the Exit rate would be nullified

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Tl;Dr

🔹 The APY realized depends on time to maturity and interest rate at the time of exiting. This is only true if you exit early.

🔹 The governing factor is the time to maturity, when the time to maturity approaches to 0 the APY you realize will approach the promised APY.

🔹 When large lending demand is fulfilled, the interest rate drops.

🔹 When large borrowing demand is fulfilled, the interest rate increases.

🔹 For a lender, if they want to exit early, they would realize more APY if the interest rates drop and they would realize less APY or maybe loss if the interest rates increase.

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[OPTIONAL]

We are bringing a series of threads to better understand a large and complex codebase (~12,000+ lines of Solidity!) most simplistically.

👀 What's upcoming?

🔹 Resources for borrowers - inside out

🔹 Borrow trade indepth