Interest Rates

Interest Rates

Borrowers pay interest on outstanding debt. Suppliers earn the portion allocated to them after the market's reserve factor. Rates respond to each market's utilization, so a quoted rate is not a fixed return for the lifetime of a position.

What drives the rate

Utilization compares current borrowed value with total supplied value, including protocol revenue shares. It is zero when the supplied value is zero.

let utilization = borrowed_value / supplied_value;

Each market sets a base borrow rate and three connected rate segments. The first runs to the mid-utilization point, the second to optimal utilization, and the third to full utilization. Higher utilization moves the market along this curve; the configured maximum caps the annual borrow rate. Protocol validation limits that maximum to 200% APR (annual percentage rate).

The rate curve caps utilization at 100% when selecting a rate. This does not mean every accounting state or action is guaranteed to stay below 100%; separate liquidity and utilization gates control actions.

Governance can update a market's rate settings. Accrued time up to the change uses the old model, and subsequent time uses the new one.

How suppliers earn

The reserve factor allocates part of accrued borrower interest to the protocol. The remainder increases supplier claims through the supply index.

let protocol_fee = accrued_borrower_interest * reserve_factor;
let supplier_reward = accrued_borrower_interest - protocol_fee;
let deposit_apr = borrow_apr * utilization * (1 - reserve_factor);

These are conceptual equations; the integer rounding rules are in Accounting and Numeric Domains. Deposit APR is a rate view, not the exact return a supplier will realize. Future utilization, rate changes, rounding, and bad-debt losses can change the result.

For an illustrative 10% borrow APR, 50% utilization, and 20% reserve factor, the deposit APR is approximately 4%. The reserve factor applies to borrower interest; it is not a charge of 20% against deposited principal.

How balances grow

Every account holds supply and debt shares. The market's indexes determine how many underlying tokens those shares represent. Interest changes the indexes without rewriting each account.

Borrow and supply indexes start at 1.0. Normal interest accrual does not reduce either index. Bad-debt socialization can reduce the affected supply index, including the value of protocol revenue shares. Accounting and Numeric Domains explains how shares convert to token amounts.

Accrual occurs when market operations or maintenance advance the indexes. Read-only projections can calculate pending accrual without storing it. Depositors do not need to claim ordinary interest separately; their supply claim already reflects it.

APR, compounding, and timing

Pool rate views report annual APR. Borrow interest compounds as indexes advance. After a long idle interval, accrual processes elapsed time in bounded intervals and recalculates the rate between them.

APY (annual percentage yield) includes the effect of compounding; a quoted APR does not. Neither fixes a future return. The timing of accrual can affect realized balances because each interval starts from its own utilization and rate, and integer math rounds the result. More frequent accrual does not guarantee the same or a larger return.

Pool APR and utilization views use stored market balances. They do not first apply pending interest. Projected indexes and a later transaction can therefore differ from the state behind a rate view. The exact accrual and rounding rules are in Accounting and Numeric Domains.

Fees and risk remain separate

Ordinary supply interest comes from lending activity. Cash flash loans and charged strategy openings have a separate fee based on principal, using the market's flash-loan fee setting. A positive fee rate charges at least one token base unit. See Flash Loans and Strategies for which flows charge it.

Accrued supply is a claim on the market, not a promise of immediately available cash. Withdrawals still need liquidity. Outstanding debt also grows between transactions and can reduce an account's health factor. See Health Factor and Collateral.

For exact arithmetic and numeric ceilings, see the formulas reference. For custody and revenue claims, see Central Pool.