Interest Rate Model
The algorithm that sets borrowing and lending rates based on pool utilization.
The algorithm that sets borrowing and lending rates based on pool utilization.
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Sep 2026 · Punteggio di freschezza: 50%
What is Interest Rate Model?
The algorithm that sets borrowing and lending rates based on pool utilization.
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- concept
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Rates are typically a function of utilization (borrowed/supplied). At low utilization, rates are low to attract borrowers; as utilization rises, rates climb steeply to incentivize lenders and deter over-borrowing. Models vary: Aave/Compound
Rate models determine the cost of leverage and the yield on deposits — core economics of lending protocols. A well-designed model keeps liquidity available (never 100% utilized) and rewards suppliers, directly influencing protocol growth an
Knowledge Graph
23 relations1. What Is an Interest Rate Model
An interest rate model is the formula a lending protocol uses to set borrowing and lending rates based on utilization — how much of the supplied liquidity is borrowed. It is the pricing engine of DeFi money markets.
2. How It Works
Rates are typically a function of utilization (borrowed/supplied). At low utilization, rates are low to attract borrowers; as utilization rises, rates climb steeply to incentivize lenders and deter over-borrowing. Models vary: Aave/Compound use kinked curves; Euler uses a dynamic curve with adjustable parameters. Rates update continuously on-chain as supply and demand shift.
3. Why It Matters
Rate models determine the cost of leverage and the yield on deposits — core economics of lending protocols. A well-designed model keeps liquidity available (never 100% utilized) and rewards suppliers, directly influencing protocol growth and risk.
4. Key Facts
- Kinked curves: low slope to a target utilization, then steep
- Optimal utilization targets usually 75-90%
- Rate parameters are governance-adjustable
- Interest accrues per-second/block via rate indexes
5. Related Concepts
- collateral-ratio
- auto-liquidation
- decentralized-lending
- yield-token
Frequently Asked Questions
What is Interest Rate Model?
The algorithm that sets borrowing and lending rates based on pool utilization.
How does Interest Rate Model work?
An interest rate model is the formula a lending protocol uses to set borrowing and lending rates based on utilization — how much of the supplied liquidity is borrowed. It is the pricing engine of DeFi money markets. Rates are typically a function of utilization (borrowed/supplied). At low utilizati
Why does Interest Rate Model matter in Web3?
- auto-liquidation - decentralized-lending - yield-token