# Borrow Rates

Echelon’s interest rate model is designed to balance **available liquidity and borrowing costs,** ensuring that lenders can withdraw their funds while discouraging excessive utilization. The model dynamically adjusts based on market conditions, responding to changes in supply and demand for each asset.

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#### **How Borrow Rates Are Determined**

The interest rate model consists of two distinct phases based on **utilization rate (U)**:

1. **Below the Optimal Utilization Rate (U\_Optimal)** – Borrow rates **increase gradually** as more funds are borrowed, maintaining stable borrowing costs while encouraging lending.
2. **Above U\_optimal** – Borrow rates **increase sharply**, discouraging excessive borrowing and preventing liquidity shortages.

This structure ensures that liquidity remains accessible for withdrawals while discouraging over-utilization of lending pools.

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#### **Interest Rate Formula & Curve Mechanics**

Borrow rates follow a variable model where:

* **At low utilization**, the rate rises gently to encourage lending and borrowing.
* **As utilization approaches full capacity**, borrowing costs spike to prevent liquidity depletion.

**Key Model Parameters:**

* **Optimal Utilization Rate (U\_optimal)** – The ideal level of asset utilization before borrowing costs increase sharply.
* **Base Variable Borrow Rate** – The minimum borrow rate when utilization is near zero.
* **Variable Rate Slope 1** – The rate of increase **before** reaching U\_optimal.
* **Variable Rate Slope 2** – The steeper rate increase **after** U\_optimal.

If **U\_optimal were set to 100%**, the interest rate would follow a simple linear model. However, to mitigate liquidity risks, Echelon sets **U\_optimal below 100%**, ensuring borrowers face higher costs when utilization nears its limit, thereby keeping the system solvent.

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#### **Market Conditions & Borrowing Costs**

* **Collateral vs. Non-Collateral Assets** – Assets frequently used as collateral must have **high liquidity** for efficient liquidations, whereas assets with ample liquidity on Echelon contribute to a more stable utilization rate.
* **Competitive Borrow Rates** – Echelon’s model is designed to **remain competitive** to prevent borrowers from seeking arbitrage opportunities in external lending markets.
* **Liquidity Mining & Incentives** – In scenarios where borrow costs are offset by liquidity mining incentives, Echelon adjusts interest rates accordingly to balance borrowing costs with liquidity rewards.

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#### **Viewing Borrow Rates**

To check the most up-to-date borrowing costs and deposit APY, users should visit the Echelon App interface, where live rates for each asset are displayed. The interest rate model ensures that borrowing remains sustainable, responsive, and optimized for both lenders and borrowers in different market conditions.


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