What are the Interest Rates and how are they determined?

Borrow rates depend on the utilization rate of the market which is the ratio of currently borrowed assets to total available assets for borrowing. Being a P2P protocol, each borrowed token must have been supplied by a lender which could result in all tokens currently being borrowed and lenders being unable to withdraw their supplied tokens at the moment. To solve this, markets have an optimal utilization rate that is targeted for each market, usually about 80%.

To drive the market towards this utilization rate, borrow rates are low if below the target to incentivize borrowers to take out loans and provide more attractive returns for lenders. If the current utilization rate is above the target, borrow rates drastically spike to disincentive taking out new loans (or incentivize repaying loans) such that there is always enough liquidity for lenders to withdraw their tokens again.

The interest model consists of two linear functions merged at the optimal utilization rate. The slopes, optimal utilization rate, and base rate parameters can be configured for each market.

LOAN Protocol provides Variable Loans, a type of loan where the borrowing rate depends on the current utilization rate and therefore fluctuates over time. Note that all borrowers of the same market also pay the same borrow rates on all of their loans.

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