# Interest Rate Model

Automating lending operations while maintaining a certain level of liquidity requires an efficient Interest Rate Model that balances supply and demand around an optimal level of utilization.

For each Lending Pool, let's define, at time t, the Utilization Rate

$U$

: $U_t = \frac{B_t}{S_t}$

where

$B_t$

is the total Borrow Balance of Token A, and $S_t$

is the total Supply Balance of Token A. - When$U$ is low, it means that most of the deposits are sitting in the reserve. They are easily accessible for immediate withdrawal but generate low interest for lenders.
- When$U$ is high, it means that most of the deposits have been lent. They generate high interest for lenders but very little liquidity is available for immediate withdrawal.

Let's define

$U^*$

as the optimal level of utilization for lenders. The Interest Rate Model's objective is to find the optimal borrowing rate $r^*$

for which $U = U^*$

. - If$U$settles below$U^*$, we can assume that the interest rate is not attractive enough for borrowers and needs to be decreased.
- If$U$ settles above$U^*$, we can assume that$r$is too attractive for borrowers and needs to be increased.

**Securd**has implemented an innovative interest rate model that allows a better convergence towards optimal utilization levels as well as a better adaptation to evolving Supply & Demand. Extensive details will be published soon.

Last modified 5mo ago