Interest Rate Model Soundness

Interest rate model soundness is the validation of the mathematical frameworks used to determine borrowing and lending rates in DeFi protocols. These models must balance supply and demand while ensuring the protocol remains solvent.

Soundness means that the rates react appropriately to market conditions without creating incentives for bad debt. Analysts use simulation and formal methods to test the model's behavior under various interest rate regimes.

This ensures that the protocol provides a stable and predictable environment for users. It is a key aspect of managing systemic risk in lending platforms.