Interest Rates

Interest rates on Curvance are dynamic and are comparable to previous models explored by Fraxlend, Rari, and Kashi. The rates are determined by a combination of utilization rates, a vertex point, and time decay.

Pool Utilization: Pool utilization refers to the extent to which available funds within a lending pool are being borrowed by users.

The protocol measures how much of the total funds available in the lending pool are actively being utilized or borrowed by users at any given time. A higher pool utilization indicates that a larger portion of the funds within the pool is being borrowed, whereas a lower utilization means that a significant portion of the funds remains unutilized or available for borrowing.

As pool utilization escalates towards maximum capacity, interest rates progressively rise beyond a designated vertex point.

This dynamic nature ensures responsiveness to market conditions: rates gradually decay over regular periods (currently set at 12 hours). Should the utilization fall below the targeted rate, the vertex rate multiplier swiftly decreases, and rates readjust downward to maintain stability.

In essence, our system embodies flexibility, allowing rates to dynamically align with the evolving demands of the lending pool while maintaining a focus on stability and user-centric efficiency.

Example: Initially, a lending pool consists of 1,000,000 supplied USDC, with 800,000 USDC being borrowed, resulting in a pool utilization of 80%. At this utilization rate, the prevailing interest rate is 2%. However, as per the dynamic interest rate model, for every 1% in utilization exceeding the assumed vertex point of 85%, interest rates will exponentially increase.

Now, suppose a whale comes in and borrows an additional 100,000 USDC, causing the utilization rate to surge to 90%. As per the dynamic model, this surge in utilization triggers an interest rate hike to 7%.

This mechanism instantly encourages borrowers to consider repaying their loans while incentivizing suppliers to inject more FRAX into the pool, striving to meet the escalating demand. The platform's responsive nature and dynamic interest rate adjustments effectively steer the lending ecosystem towards equilibrium, promoting stability and accommodating the evolving needs of users.

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