Interest Rate Mechanism

Borrow Interest Rate

LNDfi's interest rate model is designed to manage liquidity risk and optimize capital utilization. The borrowing interest rates are based on the Utilization Rate (U), which indicates how much liquidity is available in the pool:

• When liquidity is high → Interest rates remain low to encourage borrowing.

• When liquidity is scarce → Interest rates increase to promote loan repayments and additional deposits.

Interest Rate Model

Liquidity risk becomes more significant as U approaches 100%. To manage this, LNDfi uses a two-phase interest rate curve:

• Before the optimal utilization rate (U_optimal): The interest rate slope is gradual.

• After U_optimal is exceeded: The interest rate rises sharply to discourage excessive borrowing.

The borrowing rate R_t follows this model:

• If U ≤ U_optimal → Interest rate is determined by a base rate R_0 plus a small slope R_slope1.

• If U > U_optimal → The interest rate increases sharply, factoring in a steeper slope R_slope2.

Model Parameters

Several factors influence interest rates:

• Collateral vs. Borrowed Assets – Assets primarily used as collateral require consistent liquidity for liquidations.

• Liquidity Levels – Less liquid assets have more conservative interest rate structures.

• Market Conditions – Borrowing costs align with external yield opportunities to prevent arbitrage.

• Liquidity Mining Impact – LNDfi adjusts U_optimal for certain assets to manage borrowing costs, which are partially offset by liquidity incentives.

Variable Interest Rate Parameters:

• Optimal Utilization (U_optimal)

• Base Borrow Rate (R_0)

• Variable Rate Slope 1 (R_slope1)

• Variable Rate Slope 2 (R_slope2)

Supply Rate

Interest paid by borrowers is distributed as yield to LToken holders, minus a portion allocated to the treasury (defined by the reserve factor). The supply APY S_t is calculated as:

S_t = U_t × (SB_t / S_t + VB_t / V_t) × (1 - R_t)

Where:

• U_t = Utilization rate

• SB_t = Share of stable borrows

• S_t = Average stable rate

• VB_t = Share of variable borrows

• V_t = Variable rate

• R_t = Reserve factor

Users can view real-time Deposit APY on the LNDfi Dapp, which also factors in flash loan fees.