Interest Rates

Hyperdrive markets utilize the same dynamic interest rate model that was made popular by Aave. The dynamic interest rate model is designed to optimize capital efficiency and risk management by adjusting interest rates based on utilization.

The utilization is defined as the ratio between borrowing demand and supply and is calculated with the following formula;

$$Utilization = \frac{Total\:Liabilities}{Total\:Assets}$$

The goal of the dynamic interest rate model is to encourage borrowing demand up until the target utilization, also known as the kink. It achieves this through two separate interest rate slopes as shown below.

slope 0 is a gradual rise as utilization increases towards the target, whereas slope 1 is a much steeper rise. The effect of the two slope model means that whilst utilization is under the target, interest rates remain relatively low thus encouraging borrowing. When the utilization extends beyond the target, the interest rate increase quickly and thus discourages further borrowing and encourages users to repay their liabilities.