Overview
An interest rate model is the algorithm that sets borrowing and lending rates based on pool utilization. It incentivizes liquidity and stability. Different protocols use different models.
How It Works
Rates rise as utilization increases, rewarding suppliers and discouraging excessive borrowing. The model defines the rate curve. Some use a kink to steepen rates near high utilization.
Why It Matters
Interest rate models balance supply and demand in lending markets. They determine borrowing costs and lender yields. Their design affects capital efficiency and protocol risk.
Related Concepts
Interest rate models are central to Lending Pools and Lending. They connect to Utilization and protocol risk.