Interest Rate Model

Navigating the Yield Landscape and Optimizing Returns and Efficiency

Interest Rates

Maven Finance introduces a robust interest rate system modeled after AAVE that is designed to effectively manage liquidity risk and optimize asset utilization within our platform to ensure a reliable and efficient lending experience for our users.

At the core of our interest rate model lies the concept of the Utilization Rate (U). This rate serves as a crucial indicator of the capital availability within our lending pools. It guides the determination of our borrow interest rates, striking a balance between incentivizing borrowing when capital is abundant and encouraging timely repayments and additional supply when capital becomes scarce.

To effectively address liquidity risk (which increases when utilisation increases), our interest rate curve is divided into two distinct sections centered around an optimal utilization rate. The curve exhibits a gentle slope before reaching the optimal utilization rate, after which it rises sharply.

$\text{if U } \le U _{optimal}: R_{t} = R_{0} + \frac{U_{t}}{U_{optimal}}R_{slope1}$

$\text{if U } \gt U _{optimal}: R_{t} = R_{0} + R_{slope1} + \frac{U_{t}-U_{optimal}}{1-U_{optimal}}R_{slope2}$

This approach allows us to tailor our interest rates according to the prevailing liquidity conditions, enabling us to adapt dynamically to the changing demands of our users.

Our interest rate calculation follows a precise formula that takes into account the utilization rate and ensures fair and transparent interest rates for borrowers.

The technical implementation of our interest rate model employs a calculateCompoundedInterest method, which includes an approximation technique (the binomial theorem) to reduce costs in the calculation of infinite exponents.

The approximation slightly underpays liquidity providers and undercharges borrowers, however it has the advantage of great gas cost reductions.

$ActualAPY=(1+TheoreticalAPY/secsperyear)^{secsperyear}−1$

Maven Finance's interest rate model is carefully designed to enhance liquidity management, optimize capital utilization, and provide transparent and fair interest rates for borrowers and lenders.