Notional Finance

Vault details

Vault type: Leveraged PTs Network: Mainnet Borrow token: ETH PT: Dec 2024 ezETH PT

Vault strategy overview

This vault borrows the borrow token (ETH) from Notional, converts the borrow token into the PT underlying token (ezETH), and buys the PT. The PT is convertible back into the underlying token subject to liquidity and can always be redeemed for the underlying token at maturity.

Notes

1. After the PT matures, the assets convert to ezETH and continue earning yield.

2. Liquidations can only occur if they do not cause account insolvency. If a liquidation transaction would leave bad debt on Notional, it will revert.

Vault parameters

Vault Parameters	Proposed Value	Implied Leverage
LiquidationRate	1.03
MinCollateralRatioBPS	0.11	10.09
MaxDevelerageCollateralRatioBPS	0.2	6.00
MaxRequiredAccountCollateralRatioBPS	1	2.00
Maximum vault capacity	1000 ETH
Minimum borrow size	20 ETH
feeRate5BPS	0
ReserveFeeShare	80%

ezETH redemption and liquidity

ezETH is fully redeemable at any time. Redemption times vary depending on the Eigenlayer holding period + the Ethereum validator exit queue.

Given the free redeemability of ezETH, on-chain ezETH trading liquidity is less important from a risk standpoint but is still helpful in enabling instant exits and liquidations. There is substantial onchain liquidity for ezETH on Mainnet:

Protocol	Pair	TVL	USDe Percentage
Balancer	ETH / ezETH	$33.2M	56.4%
Curve	ETH / ezETH	$1M	50.15%
Uniswap	ETH / ezETH	$1.1M	37.61%

Risks

The strategy’s structure (no liquidations if they cause insolvency) and risk parameterization is designed to ensure that no insolvency can occur as long as the underlying token is redeemable at the maturity of the PT at par.

However, there are ways that this strategy could go wrong which would violate this core assumption.

1. Slashing. If capital controlled by ezETH is slashed, this could put a haircut on the ezETH redemption value. Slashing is not currently operational so this is not a concern at the moment.

2. Expanded ezETH redemption period. If the time it takes to complete an ezETH redemption expands significantly, that could cause risks for this strategy. The risks boil down to the fact that ezETH does not earn yield after redemption has been initiated, but accounts on Notional are still paying interest on their borrow. This could cause insolvency over a long enough time period.

This strategy’s risk parameters allow for a 10% decline in the ezETH price before Notional becomes insolvent. For the expanded ezETH redemption period to cause losses, the debt on a user’s position would have to increase by ~10% before the user receives their ETH back.

This is extremely unlikely. If the user was paying a 20% borrow rate (unlikely), they would still be able to wait for 6 months to get their ETH back without causing any insolvency. It is possible that the Ethereum validator exit queue could expand significantly, but six months is an unprecedented period of time and there is a very small chance that the exit queue would expand to this length.

Smart contract risk

This strategy involves smart contract risk associated with Renzo and Pendle. Both of these teams are battle-tested and have demonstrated high security standards.

• Renzo: Audits from Halborn, Sigma Prime, and Code Arena. Active bug bounty.
  • https://github.com/Renzo-Protocol/contracts-public/tree/master/Audit
• Pendle: Audits from Chain Security, Spearbit, 0xleastwood, cmichel, and Watchpug among others. Active bug bounty.
  • https://github.com/pendle-finance/pendle-core-v2-public/tree/main/audits/