Interest Rate Model

SiO2 Finance's interest rate algorithm is calibrated to manage liquidity risk and optimize utilization. The borrow interest rates are derived from the Utilisation Rate U.

UU is an indicator of the availability of an asset within the pool. The interest rate model manages liquidity risk in the protocol through user incentives to support liquidity:

• When capital is available: low interest rates to encourage borrowing.

• When capital is scarce: high interest rates to encourage repayments of debt and additional supplying.

FAQ

What is utilization rate?

Each asset has a different utilization rate:

U=Borrowtotal/Deposittotal

As U gets closer to 100%, the asset becomes scarcer. No more liquidity is available at U=100%U=100%. This situation can be problematic if depositors wish to withdraw their liquidity with no assets available. However, higher utilization results in higher returns for depositors. Thus, it's important to maximize utilization while protecting the liquidity.

What is optimal utilization rate?

The optimal utilization rate Uoptimal is defined to adjust the interest rate for each asset, based on different risk factors. In general, an asset with less liquidity and more volatility has a lower Uoptimal​. This is to change the interest more sharply and at an earlier stage without imposing more risks to the system. See more details at the section below on interest rate calculation.

What is the variable interest rate ?

The interest rate at time t (denoted as Rt​) is defined as follows:

$$If U_t < U_optimal: R_t = R_0 + (U_t / U_optimal) * R_slope1$$

$$If U_t >= U_optimal: R_t = R_0 + R_slope1 + ((U_t - U_optimal) / (1 - U_optimal)) * R_slope2$$

Here ​are parameters that are defined below (with R0=0):

Asset	U_optimal	R_slope1	R_slope2
ASTR	50%	0.08	3.0
DOT	50%	0.08	3.0
USDC	50%	0.08	1.5
USDT	50%	0.08	1.5
wBTC	50%	0.08	3.0
BAI	50%	0.08	1.5
BNB	50%	0.08	3.0
wETH	50%	0.08	3.0
nASTR	50%	0.08	3.0
DAI	50%	0.08	1.5

What is deposit APY?

The borrowing interest paid is distributed as yield for sToken holders deposited in the protocol, except for the share of yields sent to the ecosystem reserve defined by Reserve Factor. This interest rate is paid on the asset that is borrowed and then shared among all the liquidity providers. The deposit APY, DtDt​, is:

Dt=UtVt(1−Rt)

• Ut, the utilization rate

• Vt​, the variable interest rate

• Rt​, the reserve factor