Interest rate model
The Apollo Protocol's interest rate strategy is calibrated to handle liquidity risks and optimize asset utilization. Borrow interest rates are closely linked to the Utilization Rate (U). The U value signifies the availability of an asset in the protocol's reserves, and the interest rate model is employed to manage associated liquidity risks through user incentives:
When an asset is available: a low-interest rate is applied to encourage borrowers.
When an asset is scarce: a high-interest rate is applied to encourage borrowers to repay and depositors to add more assets.
In the technical implementation of borrowing rates, the calculation method relies primarily on approximations that affect higher interest rates. The actual borrow rate can be resulted as:
Both variable and stable interest models are derived from the formula above with different parameters for each asset.
Model Parameters
Interest rate parameters have been calibrated per cluster of assets that share similar risk profiles. First, it's crucial to distinguish assets that are used predominantly as collateral (volatile assets) which need liquidity at all times to enable liquidations. These assets require a low Optimal Utilization rate typically calibrated around 45%. Secondly, liquidity on Apollo Protocol is an important factor as the more liquidity, the more stable the utilization becomes: interest rates of assets with lower liquidity should be more conservative. For example, low liquidity stablecoins have a low Optimal Utilization Ratio than those with higher liquidity.
It's also key to consider market conditions: how can the asset be used in the current market? A cost to borrow on Apollo Protocol must be aligned with market yield opportunities. Alternatively, there will be a rate arbitrage with incentives for users to borrow all the liquidity on Apollo Protocol to obtain higher yield opportunities.
If market conditions change, the parameters of the interest rate can be adapted. These changes would have to adapt not only to Apollo Protocol's market availability but also to incentives across DeFi.
Interest Rate Model Parameters
Interest Rates vs Utilizations for each asset are below:
Deposit APY
Net APY
For your reference, it is calculated at frontend as follows:
Net APY = sum of PL by Asset in USD / Total Deposited in USD
PL by Asset in USD = Interest PL + Reward
Interest PL = deposited * APY in USD - borrowed * APY in USD
Reward = deposited * depositAPR in USD + borrowed * borrowAPR in USD
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