Interest Rate Model

Interest Rate Model

Based on Aave Protocol, https://docs.aave.com/risk/liquidity-risk/borrow-interest-rate.

Liquidity risk materializes when utilization is high, its becomes more problematic as UU gets closer to 100%. To tailor the model to this constraint, the interest rate curve is split in two parts around an optimal utilization rate UoptimalU_{optimal} . Before UoptimalU_{optimal} the slope is small, after it starts rising sharply.

The interest rateRtR_tfollows the model:

​ifU<Uoptimal:Rt=R0+UtUoptimalRslope1if \hspace{1mm} U < U_{optimal}: \hspace{1cm} R_t = R_0 + \frac{U_t}{U_{optimal}} R_{slope1}

​ifUβ‰₯Uoptimal:Rt=R0+Rslope1+Utβˆ’Uoptimal1βˆ’UoptimalRslope2if \hspace{1mm} U \geq U_{optimal}: \hspace{1cm} R_t = R_0 + R_{slope1} + \frac{U_t-U_{optimal}}{1-U_{optimal}}R_{slope2}​

Both the variable and stable interest models, are derived from the formula above from the Whitepaper with different parameters for each asset.

  • When U<UoptimalU < U_{optimal} the borrow interest rates increase slowly with utilization

  • When Uβ‰₯UoptimalU \geq U_{optimal} the borrow interest rates increase sharply with utilization to above 50% APY if the liquidity is fully utilized.

Variable loans see their rate constantly evolving with utilization. This means they are not ideal for financial planning.

Hence stable loans, that maintain their interest rate at issuance until the specific rebalancing conditions are met. For rebalancing the stable rate down, the loans stable rateSSneeds to be greater than the current stable rateStS_t plus a delta equal to 20%: Sβ‰₯St+20%S \geq S_t + 20\%.

For rebalancing the stable rate up, these two conditions need to be met:

  1. Utilization Rate: Ut>95%U_t > 95\%

  2. Overall Borrow Rate, the weighted average of all the borrow rates: RO<25%R_O < 25\%

Variable Interest Rate Model Parameters

Asset

Uoptimal

Base

Slope 1

Slope 2

Binance

45%

0%

8%

100%

BUSD

60%

1%

4%

100%

Bitcoin

45%

0%

8%

100%

USDC

70%

1%

7%

60%

Tether

70%

1%

7%

60%

DAI

60%

1%

7%

150%

Ethereum

45%

0%

8%

100%

LINK

45%

0%

7%

300%

ADA

45%

0%

7%

300%

DOT

45%

0%

7%

300%

LTC

45%

0%

7%

300%

Stable Interest Rate Model Parameters

Asset

Uoptimal

Base

Slope 1

Slope 2

Binance

45%

3%

10%

100%

BUSD

60%

3.5%

6%

100%

Bitcoin

45%

3%

10%

100%

USDC

70%

3.5%

6%

60%

Tether

70%

3.5%

6%

60%

DAI

60%

3.5%

6%

150%

Ethereum

45%

3%

10%

100%

LINK

45%

3%

10%

300%

ADA

45%

3%

10%

300%

DOT

45%

3%

10%

300%

LTC

45%

3%

10%

300%

BCH

45%

3%

10%

300%

Interest Rate Curves

This section shows Multi-Chain Lend (MCL) Protocol’s interest rate curves per asset.

USDC | USDT

BNB | BTC | ETH

LINK | ADA | DOT | LTC | BCH

DAI

BUSD

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