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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.
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
of a market
can be formally defined as
. Reserves being, the total amount that Finterest currently has as profit (more on this later).
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:
- refers to the multiplier of a market - which is the rate of increase in interest rate in regards to the utilization.
- being the utilization rate of market.
- 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:
The supply rate is the yield (or APY) that is given to suppliers. The supply rate
is defined as follows:
- is the borrow rate of the market.
- is the utilization rate of the market.
- being the reserve factor of the market - the percentage of the delta betweenandthat 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:
Borrow interest is accrued each time there is a successful call of any of the following methods:
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.