Interest rate model

ElaraLend implements a dynamic interest rate model that scales with the utilization rate, affecting both deposit and borrowing rates. This model is designed to maintain protocol solvency and encourage optimal capital efficiency.

Key components

1. Utilization rate: The utilization rate is the ratio of borrowed assets to total supplied assets in a specific pool. It's a crucial factor in determining interest rates.

2. Base rate: A minimum interest rate applied even at low utilization.

3. Slope: Determines how quickly the interest rate increases as utilization rises.

4. Kink point: A predefined utilization rate threshold where the interest rate curve becomes steeper.

How it works

1. Supply interest rate

• Increases as the utilization rate rises

• Encourages users to deposit assets when liquidity is needed

2. Borrow interest rate

• Also increases with utilization rate

• Discourages excessive borrowing when liquidity is low

3. Kink mechanism

• Below the kink point: interest rates increase gradually

• Above the kink point: interest rates rise more rapidly

4. Real-time accrual

• Interest accrues every second based on the current block timestamp

Formula

For utilization rate (U) below or at kink (K):

$$rate = base rate + (U / K) * slope1$$

For U above K:

$$rate = base rate + slope1 + ((U - K) / (1 - K)) * slope2$$

Where slope2 > slope1, causing a steeper increase above the kink.

This model ensures that Elara can maintain a balance between attractive yields for suppliers and sustainable rates for borrowers while adapting to varying market conditions.