Interest Rates

The interest rates on loans increase when there is more borrowing.

Given the permissionless nature of the application and considering that for a governance system there may be too many pairs to be handled individually, the protocol uses an adaptive interest rate model. Each borrowable pool has its own interest rate curve that acts independently from other borrowable pools.

The adaptive interest rate model determines interest rates according to historical supply and demand. This means that as more assets are utilized (borrowed) from a pool, the interest rate grows linearly. But when the relative amount utilized reaches a specified point (kinkUtilizationRate), the interest rate begins growing at a greater linear rate.

This chart shows that for a given supply of an asset, as more of that supply is used for loans, the interest rate charged to the borrower increases.

Note that as more supply is added to the pool, the utilizationRate reduces, and interest rates will go down.

The interest rates at any time depend from the utilizationRate and the kinkRate. The kinkRate correspond with the interest rate when the utilizationRate = kinkUtilizationRate, so whenever the kinkRate is higher also the interest rates are higher, and viceversa. The kinkRate is a parameter that is calculated algorithmically by the protocol according to historical supply and demand. Whenever the utilizationRate is greater than the kinkUtilizationRate the kinkRate increases, and viceversa. This ensures that incentives will always be balanced and that borrowers pay a fair interest to lenders based on market demand and without the need for external intervention.

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