Variable Interest Rate Modeling

Variable interest rate modeling involves the algorithms used by lending protocols to dynamically adjust borrowing and lending rates based on supply and demand. As the utilization rate of a pool increases, interest rates rise to incentivize more lenders to deposit capital and to discourage excessive borrowing.

Conversely, when demand is low, rates decrease to attract borrowers. This mechanism ensures that the pool remains balanced and that lenders are adequately compensated for their risk.

These models are usually defined by interest rate curves that map utilization to interest rates. Understanding these models is essential for borrowers to manage the cost of their debt and for lenders to optimize their yield.