# Borrow Interest Rate

Bend’s interest rate model is calibrated to manage liquidity risk and optimize utilization. The borrow interest rates come from the Utilization Rate $U$.

U is an indicator of the availability of capital in the pool. The interest rate model is used to manage liquidity risk through user incentivizes to support liquidity:

When capital is available: low interest rates to encourage loans.

When capital is scarce: high interest rates to encourage repayments for the loans and additional deposits.

## Interest Rate Model

Liquidity risk materializes when utilization is high, its becomes more problematic as 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 $U_{optimal}$. Before $U_{optimal}$ the slope is small, after it starts rising sharply.

The interest rate $R_t$ follows the model:

$if U < U_{optimal}: R_t = R_o + U_t / U_{optimal} * R_{slope1}$

$if U \ge U_{optimal}: R_t = R_o + R_{slope1} + (U_t - U_{optimal}) / (1 - U_{optimal}) * R_{slope2}$

In the borrow rate technical implementation, the calculateCompoundedInterest method relies on an approximation that mostly affects high interest rates.

## Model Parameters

The interest rate parameters have been calibrated per cluster of currencies that share similar risk profiles. First, it's crucial to distinguish assets that are used predominantly as collateral (volatile assets) which need liquidity at all times to enable liquidations. These assets require a low Optimal Utilization rate typically calibrated around 45%. Secondly, the asset's liquidity on Bend is an important factor as the more liquidity, the more stable the utilization: interest rates of assets with lower liquidity should be more conservative. For example lower liquidity stable coins have lower Optimal Utilization Ratio than those with higher liquidity.

It's also key to consider market conditions: how can the asset be used in the current market Bend's borrowing costs must be aligned with market yield opportunities. Or there would be a rate arbitrage with rational users incentivized to borrow all the liquidity on Bend to take advantage of higher yield opportunities.

When market conditions change, the interest rate parameters can be adapted. These changes must adapt to utilization on Bend’s market as well as to incentives across DeFi.

With the rise of liquidity mining, Bend also adapted its cost of borrowing by lowering of the assets affected. This increased the borrow costs that are now partially offset by the liquidity reward.

Following the favorable historical review of liquidity risk, the interest rate models have been optimized to be more competitive while keeping theirs risk mitigation properties.

Asset | Uoptimal | Ro | Rslope1 | Rslope2 |
---|---|---|---|---|

ETH | 80% | 0 | 8% | 100% |

Last updated