Dynamic interest rate

The concepts presented below are taken directly from the Aave documentation.

Principle

To ensure that the liquidity in our pools do not get depleted, a dynamic interest rate formula is used. Liquidity risk materialises when utilisation is high, its becomes more problematic as U gets closer to 100%. To tailor the model to this constraint, the interest rate curve is split in two parts around an optimal utilisation rate Uoptimal ​. Before Uoptimal , the slope is small, after it starts rising sharply. More precisely:

• When U<Uoptimal the borrow interest rates increase slowly with utilisation

• When U>Uoptimal the borrow interest rates increase sharply with utilisation to above 50% APY if the liquidity is fully utilised.

Aave

Formula

The formula to define the borrowing interest rate depending on the utilisation rate.

Parameters

The above formulas use different parameters for each asset. Below are presented these parameters for DAI and ETH

Asset	Uoptimal	R0	Rslope1	Rslope2
DAI	80%	0%	4%	75%
ETH	65%	0%	8%	100%

Example

Given the utilisation ratio is 10% for a DAI pool then the borrowing rate is 0.5%. Given the utilisation ratio is 10% for an ETH pool then the borrowing rate is 1.23%.