🧮 Interest Rate
It is undesirable for all available funds to be lent out (100% utilization). Under this circumstance, lenders cannot withdraw. Therefore, when all capital is used up, we want strong incentives in place for lenders to supply more funds to the protocol or for borrowers to return borrowed assets. Chiss utilizes a linear rate model to compute the interest rate changes.
This model applies a base rate and slope parameters to calculate variable interest rates. The Base Rate is the minimum interest rate when utilization is 0% & Slope 1 computes how steep the interest curve is as a function of the utilization ratio.
These settings are determined by governance and can be adjusted to respond to market conditions.
Dynamic Interest Rate Formula
Variable definition; Base Rate: The minimum interest rate when utilization is 0% Slope 1: Computes how steep the interest curve is as a function of the utilization ratio
e.g. If 10 million liquidity pool, utilization rate is 80%. This high rate triggers an increase in interest rates to attract more lenders and discourage further borrowing.
The interest rate dynamics, simply put is, when few people are borrowing, interest rates decrease to encourage borrowing & when many people are borrowing, interest rates increase to attract lenders and control demand.