Borrower Demand Elasticity

Borrower demand elasticity measures how sensitive the demand for borrowing is to changes in the interest rate. In decentralized lending, if a small increase in interest rates leads to a large drop in borrowing, the demand is considered elastic.

If borrowing remains steady despite rate hikes, it is inelastic. Understanding this elasticity is crucial for protocol designers when setting the parameters of their interest rate models.

If demand is highly elastic, the protocol must be very careful with rate adjustments to avoid losing its user base. If it is inelastic, the protocol has more room to increase rates to manage liquidity without significantly impacting its total loan volume.

This concept helps in fine-tuning the economic incentives that govern the protocol.