Protocol specific workflows: Interest Rates
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Building on sound macroeconomic models, interest rates (the cost of money) should increase as a direct function of demand; when borrow demand for an asset is low, interest rates should be low, and vice versa when borrow demand is high relative to supply. The utilization ratio U for each Liqwid market a combines the supply and demand into a single variable:
Governance processes will determine future updates to the demand curve which is represented as a function of utilization Ua. Borrowing interest rates will vary by Liqwid market and will also be updated via governance mechanisms as required in the future.
*Lending interest is built directly into the qToken Exchange rates.
The risk-free rate of return is the theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from a risk-free investment over a specified period of time. The real risk-free rate can be calculated by subtracting the current inflation rate from the yield of the Treasury bond matching your investment duration.
As mentioned earlier, the interest rate depends on the Utilization rate (Ua), which reflects the ratio between the borrow demand and the amount supplied to the market by lenders. The interest rate of a market A depends on its Ua and fluctuates dynamically as followed:
For every asset, an interest rate is calculated depending on the supply/demand for this asset.
Arbitrages between assets/interest rates is performed by the users by supplying different assets.
A user can supply any supported asset to the protocol.
Liqwid interest rate models include a utilization ratio we define as the kink point, above which the slope of the rate curve steepens to disincentivize new loans and to incentivize borrowers to repay existing loans and suppliers to deposit assets and capture the increased APY.
Once a market's borrow cap is reached, no more new borrowing of the selected assets can be completed. The margin system blocks any new loan if the specific asset supply does not increase once the borrow cap level is reached. Borrows can still be repaid and suppliers are still able to deposit assets in this market. The borrow cap parameter settings for each market can be viewed in the market's details page.
