🏛️Borrow Interest

Degen Wallet's interest rate algorithm is meticulously fine-tuned to navigate liquidity risk and optimize utilization. Borrow interest rates are intricately linked to the Utilization Rate, a crucial metric indicating the availability of capital within the pool. This interest rate model serves as the guardian of liquidity risk in the protocol, dynamically incentivizing user actions to maintain a robust liquidity environment. Interest Rate Model Liquidity risk materializes when utilization is high, becoming more critical as it approaches 100%. Adapting to this constraint, the interest rate curve is bifurcated around an optimal utilization rate . Before this point, the slope is gradual; afterward, it steepens.

The interest rate follows the model:

InterestRate=BaseRate+(Slope1+Slope2×UtilizationRateUtilizationRate)Interest Rate=Base Rate+( Slope 1+Slope 2×Utilization Rate Utilization Rate )

In the technical implementation of the borrow rate, the calculateCompoundedInterest method relies on an approximation, primarily impacting high interest rates. The resulting actual borrow rate is as follows:

  • When the borrow interest rates increase slowly with utilization.

  • When the borrow interest rates increase sharply with utilization, exceeding 50% APY if liquidity is fully utilized.

Both the variable and stable interest models are derived from the formula above, as outlined in the Whitepaper, with unique parameters for each asset.

Model Parameters Firstly, it's crucial to distinguish assets primarily used as collateral (i.e., volatile assets), requiring continuous liquidity for liquidations. Secondly, the asset’s liquidity in Degen Wallet is pivotal; the more liquidity, the more stable the utilization. Assets with lower liquidity should have more conservative interest rates.

Consideration of market conditions is key (i.e., how the asset can be used in the current market?). Degen Wallet’s borrowing costs must align with market yield opportunities, avoiding rate arbitrage where users are tempted to borrow all liquidity on Degen Wallet to exploit higher yield opportunities.

With the surge of liquidity mining, Degen Wallet adjusted its borrowing costs by lowering the Uoptimal of the affected assets. Although this increased borrow costs, they are now partially offset by liquidity rewards.

Variable Interest Rate Model Parameters Variable rate parameters:

  • Base Variable Borrow Rate

  • Variable Rate Slope 1

  • Variable Rate Slope 2

Stable Interest Rate Model Parameters Stable rate parameters:

  • Base Variable Borrow Rate

  • Variable Rate Slope 1

  • Variable Rate Slope 2

  • Stable to Total Debt Ratio

While the stable rate provides predictability for the borrower, it comes at a cost, with interest rates higher than the variable rate. Assets most exposed to liquidity risk do not offer stable rate borrowing. The stable rate model's base rate corresponds to the average market rate of the asset.

Stable Interest Rate Rebalance Under certain conditions, the protocol allows stable rates to be rebalanced to prevent a large percentage of liquidity being borrowed at a stable rate below the market variable rate. In V3, the condition for rebalance is if the current supply rate <= supply rate if all borrows are variable * 0.9, smart contract reference.

V3 Interest Rate Parameters The interest rate parameters for V3 markets are deployed with three interest rate strategies calibrated per cluster of assets that share similar risk profiles.

Rate Strategy Volatile One Volatile assets needing constant liquidity are calibrated at a low Optimal Utilization Ratio:


Rate Strategy Stable One Low liquidity stablecoins have a lower Optimal Utilization Ratio than those with higher liquidity:

  • DAI

Rate Strategy Stable Two High liquidity stablecoins calibrated to lower rates to encourage borrowing:


When market conditions change, interest rate parameters must adapt to utilization on Degen Wallet's market and incentives across DeFi.

Supply rate The borrow interest rates paid are distributed as yield to aToken holders who have supplied to the protocol, excluding a share of yields sent to the ecosystem reserve defined by the reserve factor. This interest rate is generated on the borrowed-out asset and then shared among all liquidity providers. The supply APY, , is:

SupplyAPY=(UtilizationRatio×VariableBorrowRate×(1ReserveFactor))+(StableBorrowRate×StableDebtRatio×(1ReserveFactor))SupplyAPY=(UtilizationRatio×VariableBorrowRate×(1ReserveFactor))+(StableBorrowRate×StableDebtRatio×(1ReserveFactor))Supply APY=(Utilization Ratio×Variable Borrow Rate×(1−Reserve Factor))+(Stable Borrow Rate×Stable Debt Ratio×(1−Reserve Factor))Supply APY=(Utilization Ratio×Variable Borrow Rate×(1−Reserve Factor))+(Stable Borrow Rate×Stable Debt Ratio×(1−Reserve Factor))

You can view the protocol's deposit APY on the Degen Wallet App for each asset. The average Supply APY over a period also includes Flash Loan fees.

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