Interests

Interest Rate Model

Interest rates in LayerBank are dynamic and determined by a utilization-based interest rate curve. This ensures that lending markets remain balanced — incentivizing borrowing when liquidity is abundant and attracting deposits when liquidity is scarce.

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Utilization Rate (U)

Utilization measures how much of the pool's liquidity is currently borrowed:

$U = \frac{\text{Borrowed}}{\text{Supplied}}$

• Low Utilization (U ↓) → lower borrow rates, encouraging more borrowing.

• High Utilization (U ↑) → higher borrow rates, attracting more suppliers.

This feedback loop helps maintain an efficient capital market.

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Borrower Interest Rate

The Borrow APR is calculated using a double-slope interest rate model:

• Below Optimal Utilization: Borrow APR increases linearly at a slower slope (Slope 1).

• Above Optimal Utilization: Borrow APR rises more steeply (Slope 2) to quickly restore liquidity balance.

$$R = \begin{cases} Slope_1 \times U & \text{if } U \leq U_{optimal} \\ Slope_1 \times U_{optimal} + Slope_2 \times (U - U_{optimal}) & \text{if } U > U_{optimal} \end{cases}$$

• Optimal Utilization (U_optimal): Target utilization level set by the protocol.

• Slope 1 / Slope 2: Parameters defining the interest rate curve’s sensitivity.

Example:

• Slope 1 = 4%, Optimal U = 80%

• If U = 60% → Borrow APR ≈ 3.0%

• If U = 90% → Borrow APR increases faster, protecting pool liquidity.

Borrow rates are recalculated continuously and may change at any time based on pool activity and DAO governance parameters.

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Supplier Interest Rate

Supplier (Lender) APR is derived from Borrow APR and Utilization:

$$Supply\ APR = Borrow\ APR \times U \times (1 - Reserve\ Factor)$$

• Reserve Factor: Portion of borrower interest allocated to the protocol treasury.

• Effect: As utilization rises, supplier APR increases, incentivizing more liquidity deposits.

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Key Takeaways

• Dynamic Market: Interest rates adapt in real time to market demand.

• Capital Efficiency: Keeps pools near optimal utilization, balancing supply & demand.

• Incentive Alignment: Higher rates at high U attract more suppliers, lower rates at low U attract more borrowers.

• DAO Governance: Parameters (Optimal U, Slopes, Reserve Factor) can be adjusted by governance to respond to market conditions.