# Types of Interest Rates

#### **Variable Interest Rates**

* Adjust dynamically based on the utilization ratio of a liquidity pool.
* Encourages equilibrium between supply and demand.

**Formula:**

**Interest Rate** = Base Rate + (Utilization Ratio × Multiplier)

**Utilization Ratio:**

The proportion of the pool's liquidity that is currently borrowed.\
**Utilization Ratio** = Total Borrowed ÷ Total Supply

**Example:**

* If 80% of a pool is borrowed, the base rate is 2%, and the multiplier is 10%, the interest rate is calculated as:\
  **Interest Rate** = 2% + (0.8 × 10%) = 10%

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#### **Stable Interest Rates**

* Offers borrowers a predictable rate, protecting against market volatility.
* Typically higher than variable rates to account for potential rate fluctuations.
* Ideal for borrowers requiring long-term certainty.

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