Borrow Interest Rate
Drift's lending pools work similar to the lending pools of Aave.
Each market has an optimal borrow rate and max borrow rate and uses this piecewise function based on the Utilisation Rate (U).
The Utilisation Rate represents the availability of capital within the system.
- If U is high -- there is abundant capital within the system and the protocol users are given incentives in the form of low interest rates to encourage borrowing;
- If U is low -- capital within the system is scarce and the protocol will increase interest rates to incentivise more capital supply and repayment of debt.
Note: this model has been adapted from Aave's interest rate model. The paramaters and model will be iterated and improved as Drift's borrow lend engine grows. Last Updated: 21 October 2022.
Liquidity risk materialises when utilisation is high and this 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 Uo. Before Uo the slope is small, after it begins rising sharply.
The interest rate (InterestRate) model:
The resulting model produces the following graph: