We talk with Teddy about how Notional Finance introducing fixed rates to crypto and a new set of use cases in DeFi.
Hello! What’s your background, and what are you working on?
My name is Teddy Woodward, and I’m the Co-Founder of Notional Finance. I come from a traditional finance background having spent about four years as an interest rate swap trader for Barclays in London. I was amazed at how low-tech large parts of the financial system were (I executed all of my trades directly with other humans over the phone!). But my time in traditional finance taught me a lot nonetheless.
Trading swaps at Barclays placed me at the center of some of the largest debt markets in the world. They drill you on what’s called “the yield curve” - the set of interest rates by maturity from one day all the way out to 30 years. Every financing or investment decision is made within the context of the yield curve. Something you notice early on is that almost every single bond issued carries a fixed rate coupon. Floating rate debt is almost nonexistent. In general, when people are committing to a multi-year loan - whether as a borrower or as a lender - they like to know exactly what interest rate they’ll be paying or receiving, and that means they want fixed rates. It takes guts to commit to a 30-year loan without knowing what interest rate you’ll be paying!
This experience led me to start Notional along with my partner Jeff Wu. Notional is a decentralized protocol enabling fixed-rate lending and borrowing of crypto-assets on Ethereum via on-chain liquidity pools. Users can lend or borrow a broad set of Ethereum-based assets at fixed rates of interest for up to one year. Fixed-rate lending is important because it gives users the certainty they need to plan for the long-term.
By introducing fixed rates to crypto, we unlock a whole new set of use cases for what can be done in DeFi, and that’s really exciting to be a part of. Global debt markets total more than $130+ trillion, and the vast majority of that is in fixed rate products. But in crypto right now, fixed rates represent less than 1% of the debt. We’re excited to supercharge DeFi’s growth and bring in more economic activity into the crypto ecosystem, which has the potential to benefit everyone in the space.
What’s Notional’s backstory?
Jeff and I got interested in DeFi around the same time - pretty near the beginning. At that time, there were only a few projects around. I remember seeing Compound and thinking that what that team had built was the first piece of a completely on-chain interest rate market, and that got me excited. Compound had managed to find success offering just the first point on the yield curve - the rest of the curve was just waiting to be built! This felt like a huge opportunity, so I upped stakes and moved from London all the way to San Francisco.
The first day I was in San Francisco, I decided to go to the DeFi hackathon, where I had the great fortune to meet Jeff. Beyond just a strong technical background in engineering and product management - skills that I lacked - Jeff actually had the same idea as I did! In fact, it was Jeff who proposed that we try and build a fixed rate lending product at that hackathon, not me. We didn’t make a ton of progress on the product that weekend, but we made enough to win a top prize at that hackathon and convince ourselves that we should go into business together. We started Notional full-time two months later in January 2020.
The blend of tech and financial expertise that Jeff and I bring to the table is what makes our team unique. This is a combination that I haven’t seen very much of in the DeFi space. In general, the people with finance backgrounds like mine either don’t understand the technology well enough to know how to use it, or they’re unwilling to take a risk on something as new and unproven as DeFi. As a result, many teams in the space lack financial expertise, and can tend to neglect the economic aspects of protocol design. Jeff and I work well together because I know the economic properties the protocol needs to maintain, and Jeff can actually take a design and build it.
What went into building Notional?
A lot of work, and multiple code rewrites! As a matter of fact, Notional started as an interest rate swap platform called Swapnet until we realized that it wouldn’t work without the underlying infrastructure that Notional provides. But after two or three months, we figured that out, scrapped Swapnet, and got to work building Notional. Around June of 2020 (~six months after we started the company), we raised our seed round from some amazing investors like 1Confirmation, Parafi, Nascent, and Coinbase, and in January 2021 we launched Notional V1 to Mainnet. We raised our Series A from Pantera and others in April 2021, and now we’re here, on the cusp of launching our V2!
Building a DeFi protocol is equal parts exciting and terrifying. DeFi can do amazing things, but the consequences of even a small oversight can result in millions of dollars in user losses. That’s why we take security so seriously, and it’s why we have devoted so much of our time and resources toward getting our code audited. In just the last year, we’ve gotten three audits from Open Zeppelin and have three more in progress:
- One audit from ABDK
- A formal verification report from Certora
- An upcoming audit from Code Arena
Who is your target user and how do you differentiate from your competitors?
Our target market is anyone who wants to be able to plan for the future using their crypto assets. Lots of current DeFi users fall into that category, but also lots of crypto users who currently rely on CeFi. We want to bring the benefits of a transparent, trustless, and decentralized system like Notional to those users. We’re also excited about the prospect of bringing more mainstream users like family offices and other institutional investors into DeFi. We built Notional to give everyone, from the casual crypto holder to the crypto hedge fund, the tools and the ability to manage their finances like a professional.
Fixed-rate lending protocols have proliferated recently, but those protocols are focused exclusively on lenders and completely neglect users who want to borrow at fixed rates. Notional is one of only two fixed rate protocols that cater to both lenders and borrowers, and that’s a huge advantage. Serving both sides of the market increases the number of users we can reach and the presence of borrowers on our platform pushes up our interest rates and creates better opportunities for lenders.
What are your goals for the future?
We believe that our V2 will help catalyze the next chapter in DeFi’s adoption. The top metric that I’m looking for there is lending and borrowing volume - are people using this protocol and using it in size? I want to see that you can lend and borrow 100 million dollars in 3 clicks - that would fulfill Notional’s promise of being truly revolutionary. Getting there is going to require a lot of liquidity, and the changes that we’ve put into Notional V2 should put us in the position to attract the liquidity that we need, so I feel confident we’ll get there.
Beyond sheer volume of usage, I’d like to see a larger and more engaged community. Right now the core team makes the primary decisions. That’s inevitable for a relatively early stage project. But I want to get to a point where the community takes more control and drives more of the protocol’s development and decision making. At the end of the day, no matter how smart you think you are, an active and empowered community of thousands is going to grow Notional faster than any centralized company could.
What are your future thoughts for the DeFi market?
I think DeFi is at an inflection point. I see headlines in major mainstream media organizations about DeFi, I have conversations with former friends and colleagues in banking about it, and it’s clear that mainstream understanding - and interest - is advancing rapidly. I think that foretells a significant amount of capital that is getting ready to move into the space. This is going to be great in many ways, but it’s also going to raise the stakes.
The arrival of risk-averse institutional capital could change the culture in DeFi and push some projects toward stability and away from experimentation. Early DeFi adopters have been willing to take lots of risk, and this has fostered an environment where entrepreneurs and crypto projects could experiment and innovate without being overly concerned about making mistakes. But institutional capital is going to be less forgiving. So I’m interested to see how the culture of DeFi will evolve over the next few years - will we get more conservative as new players come in? Will the attitude of the DeFi old guard rub off on new entrants? Will DeFi splinter into different factions? Only time will tell! But for what it’s worth, I think there’s far too much left to be built for DeFi to settle into some steady state yet.
Where can we go to learn more?
To find out more: