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%

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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