Interest rate model
Vicuna Finance uses up to four dynamic interest rate models for its borrow and lending pools at launch. This model adjusts interest rates based on supply and demand within each pool, following a structure that is commonly adopted in decentralized finance. The key components of this model include:
Base Interest Rate (Stable Rate): This is the minimum interest rate applied when the pool utilization is low, ensuring lenders earn a baseline return on their assets, even when borrowing demand is minimal.
Utilization Rate: The utilization rate represents the percentage of total supplied liquidity that is being borrowed. When utilization is low, interest rates remain closer to the base rate. As utilization increases, interest rates rise, incentivizing more liquidity providers to supply funds while discouraging excessive borrowing.
Kink Points (Two-Tier or Multi-Tier Model): Vicuna Finance employs a "kinked" interest rate model. In this system, there is a specific utilization threshold (the "kink") at which interest rates begin to rise sharply. Below this kink, interest rates increase gradually, but beyond this point, they spike significantly to maintain sufficient liquidity in the pool and prevent over-utilization.
Dynamic Rate Adjustments: Interest rates in Vicuna Finance adjust algorithmically in response to real-time market conditions, such as changes in liquidity supply, borrowing demand, and market volatility. This ensures that interest rates are competitive and responsive to user activity, maintaining a healthy balance between supply and demand.
Interest Rate Caps: To prevent extreme fluctuations, Vicuna Finance may employ caps on interest rates, ensuring stability during volatile periods and protecting both borrowers and lenders from unsustainable rate swings.
Overall, Vicuna Finance’s dynamic interest rate model is designed to optimize liquidity utilization while protecting the protocol’s long-term health by adjusting rates based on market dynamics.
Model 1: Stable or LST
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Model 2: High marketcap
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Model 3: General
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Model 4: xxxx
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