Interest Rate Model
Mitigating liquidity risk through the borrow interest rate model
Vinci’s interest rate strategy is calibrated to manage liquidity risk and optimise utilisation. The borrow interest rates come from the
Each currency reserve is characterised by its utilisation rate
monitors which share of the reserve’s total capital is borrowed at time
is an indicator of the availability of capital in the pool. The interest rate model is used to manage liquidity risk through user incentivises to support liquidity:
- When capital is available: low interest rates to encourage loans.
- When capital is scarce: high interest rates to encourage repayments of loans and additional deposits.
Liquidity risk materialises when utilisation is high, its becomes more problematic as
gets closer to 100%. To tailor the model to this constraint, the interest rate curve is split in two parts around an optimal utilisation rate
the slope is small, after it starts rising sharply.
The interest rate
follows the model:
The resulting actual borrow rate is:
- Whenthe borrow interest rates increase slowly with utilisation
- Whenthe borrow interest rates increase sharply with utilisation to above 50% APY if the liquidity is fully utilised.
The borrow interest rates paid are distributed as yield for vToken holders who have deposited in the protocol, excluding a share of yields sent to the ecosystem reserve defined by the reserve factor. This interest rate is paid on the capital that is lent out then shared among all the liquidity providers. The deposit APY,
- , the utilisation ratio
- , the borrow interest rate
- , the reserve factor
The reserve factor allocates a share of the protocol's interests to a collector contract as reserve for the ecosystem incentives.