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 UU:

Ut=BtStU_t = \frac{B_t}{S_t}

​where BtB_t​ is the total Borrow Balance of Token A, and StS_t​ is the total Supply Balance of Token A.

  • When UU​ 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 UU​ 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 Uβˆ—U^*​as the optimal level of utilization for lenders. The Interest Rate Model's objective is to find the optimal borrowing rate rβˆ—r^*​ for which U=Uβˆ—U = U^*.

  • If UU settles below Uβˆ—U^* , we can assume that the interest rate is not attractive enough for borrowers and needs to be decreased.

  • If UU​ settles above Uβˆ—U^*​, we can assume that rr 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.

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