⚖️Borrow Rates

Details on how Borrow Rates are determined

The interest rate model is designed to mitigate liquidity risk, particularly when utilization is high. The model has two parts:

1. Below the optimal utilization rate (U_optimal), the rate increases gradually.

2. Beyond U_optimal, the rate increases steeply to discourage high utilization.

The interest rate 𝑅𝑡​ follows the model:

The borrow rates rise gently with increased utilization but spikes when utilization approaches full capacity, to manage the liquidity effectively. Interest rate (IR) curves dictate supply and borrow rates based on an asset’s utilization rate. These rates are intended to maintain market equilibrium, while ensuring that lenders can access their liquidity should they wish to withdraw capital.

Model Parameters:

Key parameters for the variable interest rate model include:

• Optimal Utilization Rate (U_optimal)

• Base Variable Borrow Rate

• Variable Rate Slope 1 (before U_optimal)

• Variable Rate Slope 2 (after U_optimal)

Interest rate slope change past U optimal

Theoretically, if the optimal Utilization rate was set to 100%, the rates would follow a linear model.

It's essential to differentiate between assets primarily used as collateral, which require high liquidity for liquidation purposes, and those with ample liquidity on Echelon Markets, which contribute to a stable utilization rate. Market conditions also influence borrowing costs; Echelon's rates must remain competitive to prevent arbitrage opportunities.

In scenarios like liquidity mining, where borrow costs are influenced by external incentives, Echelon adapts its interest rates to balance the cost of borrowing with liquidity rewards. For the latest on deposit APY and borrowing costs, users should refer to the Echelon App interface for each asset.