Kinked Interest Rate Curves

Kinked Interest Rate Curves are a common design in decentralized lending where the interest rate function has a "kink" at a specific utilization point. Below this point, the interest rate increases slowly as utilization grows.

Once the kink is reached, the interest rate increases much more aggressively. This design is intended to incentivize lenders to deposit more capital and borrowers to repay their loans when the pool is nearing capacity.

It helps prevent the pool from becoming completely depleted. The location of the kink is a critical parameter that is often set based on historical utilization data.

It provides a smooth and predictable way to manage liquidity risk. By using this curve, protocols can maintain stability while providing efficient rates for most market conditions.

It is a standard tool for building resilient money markets.