Interest Rate Models
Learn about how the borrowing interest rate is calculated for each asset
Each pair within the system is set up to utilize a specific interest rate. Upon launch, Tren Finance offers support for a linear and variable rate with more to be implemented in the future by the team and as proposed by the DAO
Linear Model
The Linear Model implemented in Tren's CDP protocol establishes a straightforward relationship between the borrowing rate and the utilization of assets within the protocol. In this model, the interest rate solely functions as a linear equation of utilization. This simplicity allows for a transparent and easily understandable mechanism for users interacting with the protocol.
Lower Utilization, Lower Rates
When the utilization of assets in the CDP protocol is low, indicating that a smaller proportion of available assets are being borrowed, the interest rate decreases proportionally. This encourages users to engage with the protocol during periods of underutilization by providing more attractive borrowing rates.
Higher Utilization, Higher Rates
Conversely, as utilization increases and more assets are borrowed, the interest rate rises linearly. This increase serves two purposes: to manage risk associated with higher asset utilization and to optimize the protocol's revenue streams during periods of heightened demand for borrowed assets.
Predictability and User Understanding
The linear nature of this model ensures predictability for users. They can easily gauge the borrowing cost based on the current utilization level, making it accessible for both experienced and novice participants in the DeFi ecosystem.
Balancing Protocol Objectives
The Linear Model efficiently balances the protocol's objectives by incentivizing borrowing during periods of low utilization and ensuring that the borrowing rate adequately compensates for increased risk and demand during high utilization.
Variable Model
Tren Finance's Variable Model introduces a dynamic and responsive interest rate mechanism, directly tied to utilization. Unlike the Linear Model, the Variable Model employs a rate function represented as f (Utilization) = rate. This function allows for a more nuanced adjustment of the interest rate, providing increased flexibility in response to changing utilization conditions.
Instantaneous Response
The rate function responds promptly to changes in utilization, ensuring that the interest rate adjusts in real-time as utilization fluctuates. This responsiveness helps maintain equilibrium between supply and demand within the protocol.
Slope Intensification
With utilization surpassing the target, the slope of the rate function intensifies. This means that as the utilization increases beyond a certain threshold, the interest rate increases at an accelerated rate. This dynamic response aims to prevent the protocol from becoming excessively exposed to risks associated with overutilization.
Curve Alterations during Prolonged Periods
Prolonged periods of either low or high utilization can lead to alterations in the shape of the rate curve. For instance, if utilization remains consistently low, the curve may adapt to provide even more favorable rates to attract users. Conversely, persistent high utilization may result in a steeper curve to align with increased risk.
Fine-Tuned Risk Management
The Variable Model fine-tunes risk management by ensuring that the interest rate adjusts not only based on the level of utilization but also on the rate of change of utilization. This nuanced approach helps Tren.Finance maintain a robust risk management strategy.
Time-Weighted Model
This allows the interest rate to dynamically adjust based on the utilization, i.e., the amount of assets borrowed. When utilization falls below the target, interest rates decrease, and when it exceeds the target, interest rates increase.
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