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Interest Rates

Not arbitrarily defined by a central entity, but by pure mathematics.
Finterest has three important values used to calculate accurate interest rates - the utilization rate, supply rate and borrow rate.

Utilization Rate

The utilization rate of a market is the ratio between total borrowed assets and total lent assets - think of it as the percentage of used assets in a market. It is the core of the interest rate model.
The utilization rate
RR
of a market
xx
can be formally defined as
Rx=Borrowedx/(Suppliedx+Borrowedx​−Reservesx)R_x=Borrowed_x​/(Supplied_x​+Borrowed_x​−Reserves_x​)
. Reserves being, the total amount that Finterest currently has as profit (more on this later).

Borrow Rate

The supply rate of a market is the interest of borrowers paid yearly. That is, the delta borrowers have to include when repaying an open position.
It can be formally defined as:
Bx=MulxRx+BasexB_x=Mul_x ∗ R_x+Base_x
  • MulxMul_x
    refers to the multiplier of a market - which is the rate of increase in interest rate in regards to the utilization.
  • RxR_x
    being the utilization rate of market
    xx
    .
  • BasexBase_x
    refers to the base rate of a market - the ever possible minimum borrowing rate.
So for example, there are 1000 BTC supplied, and 100 BTC borrowed, which gives us a 10% utilization rate, the multiplier for BTC is set at 20% and the base rate at 5%. The borrow rate for BTC would be 7%, seen as follows:
Bx=0.20.1+0.05=0.07B_x = 0.2 * 0.1 + 0.05 = 0.07

Supply Rate

The supply rate is the yield (or APY) that is given to suppliers. The supply rate
SS
of market
xx
is defined as follows:
Sx=BxRx(1Rfx)S_x = B_x * R_x *(1 - Rf_x)
  • BxB_x
    is the borrow rate of the market.
  • RxR_x
    is the utilization rate of the market.
  • RfxRf_x
    being the reserve factor of the market - the percentage of the delta between
    SxS_x
    and
    BxB_x
    that Finterest stores as profit.
Let's go through a scenario using the same market as in the borrow rate (BTC) - it has a 10% utilization rate, the borrow rate is 7% and the reserve factor is set to 15%. The supply rate would be 0.59%, calculated as follows:
Sx=0.070.1(10.15)S_x = 0.07 * 0.1 * (1 - 0.15)

How is interest accrued?

Borrow interest is accrued each time there is a successful call of any of the following methods:
  • Borrow()
  • Mint()
  • Repay()
  • Redeem()
These methods all alter the ratio of assets in the protocol.
As such, the rates are ever-changing, and the really attractive supply rate that you are obtaining today can fluctuate heavily depending on large movements between the borrowed and supplied assets.