Interest Rate Model

SiO2 Finance's interest rate algorithm is calibrated to manage liquidity risk and optimize utilization. The borrow interest rates are derived from the Utilisation Rate $U$.

$U$ is an indicator of the availability of an asset within the pool. The interest rate model manages liquidity risk in the protocol through user incentives to support liquidity:

• When capital is available: low interest rates to encourage borrowing.

• When capital is scarce: high interest rates to encourage repayments of debt and additional supplying.

FAQ

What is utilization rate?

Each asset has a different utilization rate:

$$U=Borrow_{total} / Deposit_{total}$$

As U gets closer to 100%, the asset becomes scarcer. No more liquidity is available at $U=100\%$. This situation can be problematic if depositors wish to withdraw their liquidity with no assets available. However, higher utilization results in higher returns for depositors. Thus, it's important to maximize utilization while protecting the liquidity.

What is optimal utilization rate?

The optimal utilization rate $U_{optimal}$ is defined to adjust the interest rate for each asset, based on different risk factors. In general, an asset with less liquidity and more volatility has a lower $U_{optimal}$. This is to change the interest more sharply and at an earlier stage without imposing more risks to the system. See more details at the section below on interest rate calculation.

How is the variable interest rate calculated for each asset?

The interest rate at time $t$ (denoted as $R_t$) is defined as follows:

$if \hspace{1mm} U < U_{optimal}: \hspace{1cm} R_t = R_0 + \frac{U_t}{U_{optimal}} R_{slope_1}$

$if \hspace{1mm} U \geq U_{optimal}: \hspace{1cm} R_t = R_0 + R_{slope_1} + \frac{U_t-U_{optimal}}{1-U_{optimal}}R_{slope_2}$

Here ​are parameters that are defined below (with $R_0=0$):

Asset	U_optimal	R_slope1	R_slope2
USDC	90%	0.04	0.60
BUSD	same as above	same as above	same as above
BAI	same as above	same as above	same as above
USDT	same as above	same as above	same as above
DAI	same as above	same as above	same as above
aUSD	same as above	same as above	same as above
WETH	70%	0.08	1.00
WBTC	65%	0.08	1.00
DOT	65%	0.08	1.50
BNB	55%	0.08	1.50
WASTR	55%	0.08	3.00
nASTR	45%	0.08	3.00

To illustrate, here are the interest rates for some assets with different utilization rate:

Interest rates per asset with different utilization rates

What is deposit APY?

The borrowing interest paid is distributed as yield for sToken holders deposited in the protocol, except for the share of yields sent to the ecosystem reserve defined by Reserve Factor. This interest rate is paid on the asset that is borrowed and then shared among all the liquidity providers. The deposit APY, $D_t$, is:

$D_t = U_t V_t(1-R_t)$

• $U_t$, the utilization rate
• $V_t$, the variable interest rate
• $R_t$, the reserve factor

The average deposit APY over a period also includes any Flash Loan fees incurred, and $SIO2 reward incentives.