Interest Rate Curve Optimization

Interest rate curve optimization is the process of setting the mathematical function that dictates borrowing costs based on supply and demand. The goal is to maintain a balance where lenders are incentivized to provide capital and borrowers have access to liquidity at sustainable rates.

When demand is high, the curve increases rates to encourage supply; when supply is high, it decreases rates to encourage borrowing. This optimization requires constant monitoring of market data to ensure the protocol remains competitive.

Poorly tuned curves can lead to liquidity crunches or underutilized capital. It is a critical task for maintaining a healthy lending ecosystem.