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Interest Rates

Each pair is configured to change interest rates as a function of Utilization. Utilization is the total amount of deposited assets which have been lent to borrowers. Fraxlend currently has two interest rate models available for use:

- 1.The Linear Rate
- 2.Time-Weighted Variable Rate.

The Linear rate is a configurable function that allows for two linear functions of the form

`y = mx +b`

. The function takes parameters which are defined at the time the Pair is created.These configuration values are immutable and fixed at time of Pair creation.

The Interest Rate is calculated using the following formulae:

If **Utilization Rate is equal to Vertex Utilization** then:

$InterestRate(U = U_{vertex}) = Rate_{vertex}$

If **Utilization Rate is less than Vertex Utilization** then:

$InterestRate(U<U_{vertex}) = Rate_{min} + \left(U\times \frac{(Rate_{vertex} - Rate_{min})}{U_{vertex}}\right)$

If **Utilization Rate is greater than Vertex Utilization** then:

$InterestRate(U>U_{vertex})= Rate_{vertex} + \left((U - U_{vertex}) \times \left(\frac{Rate_{max} - Rate_{vertex}}{1 - U_{vertex}}\right)\right)$

The Time-Weighted Variable Interest Rate adjusts the current rate over time. The variable interest rate is configured with a half-life value, given in seconds, which determines how quickly the interest rate adjusts.

The Time-Weighted Variable Interest Rate allows the market to signal the appropriate interest rate.

When **Utilization is below the target range**, the interest rate lowers, this encourages more borrowing and lenders to pull their capital, both of which push the Utilization Rate back into the target range.

When **Utilization is above the target range**, the interest rate increases which encourages more lending and less borrowing, bringing the Utilization back towards the target range. Encouraging participants to borrow or lend as a function of both time and utilization.

The following graph shows how the interest rate changes when the Interest Rate Half-Life is 4 hours, with a Target Utilization Range of 75% - 85%:

This allows the market, not the pair creator, to decide the appropriate interest rate of a given asset-collateral pair, the pair creator only needs to provide a target utilization.

Last modified 24d ago

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Linear Rate

Time-Weighted Variable Interest Rate