# Borrow Interest Rate

Mitigating liquidity risk through the borrow interest rate model

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.

To retrieve the interest rate strategy contract on-chain, see this section of the developer docs.

## Interest Rate Model

In the borrow rate technical implementation, the calculateCompoundedInterest method relies on an approximation that mostly affects high interest rates. The resulting actual borrow rate is as follows:

Both the variable and stable interest models, are derived from the formula above from the Whitepaper with different parameters for each asset.

Variable debt see their rate constantly evolving with utilisation.

Alternatively, stable debts maintain their interest rate at issuance until the specific rebalancing conditions are met. In V3 interest models are optimised by new rate strategy parameter **Optimal Stable/Total Debt Ratio** to algorithmically manage stable rate.

## Model Parameters

First, it’s crucial to distinguish assets that are used predominantly as collateral (i.e., volatile assets), which need liquidity at all times to enable liquidations. Second, the asset’s liquidity on Aave is an important factor as the more liquidity, the more stable the utilisation. The interest rates of assets with lower liquidity levels should be more conservative.

It is also key to consider market conditions (i.e., how can the asset be used in the current market?). Aave’s borrowing costs must be aligned with market yield opportunities, or there would be a rate arbitrage with users incentivized to borrow all the liquidity on Aave to take advantage of higher yield opportunities.

With the rise of liquidity mining, Aave adapted its cost of borrowing by lowering the *Uoptimal* of the assets affected. This increased the borrow costs that are now partially offset by the liquidity reward.

### Variable Interest Rate Model Parameters

Variable rate parameters:

Base Variable Borrow Rate

Variable Rate Slope 1

Variable Rate Slope 2

### Stable Interest Rate Model Parameters

Stable rate parameters:

Base Variable Borrow Rate

Variable Rate Slope 1

Variable Rate Slope 2

Stable to Total Debt Ratio

The stable rate provides predictability for the borrower; however, it comes at a cost, as the interest rates are higher than the variable rate.

The assets that are most exposed to liquidity risk do not offer stable rate borrowing.

The base rate of the stable rate model corresponds to the average market rate of the asset.

#### Stable Interest Rate Rebalance

In certain conditions, the protocol enables stable rates to be rebalanced to avoid a large percentage of liquidity being borrowed at a stable rate below market variable rate. In V3, The condition for rebalance is if the current supply rate <= supply rate if all borrows are variable * 0.9, smart contract reference.

### V3 Interest rate Parameters

The interest rate parameters for V3 markets have been deployed with 3 interest rate strategies calibrated per cluster of assets that share similar risk profiles.

## Rate Strategy Volatile One

Volatile assets need liquidity at all times and are thus calibrated at a low Optimal Utilisation Ratio

AAVE, BAL, CRV, DPI, GHST, LINK, SUSHI, WAVAX, WBTC, WETH, WFTM, WMATIC, WONE

## Rate Strategy Stable One

Low liquidity stablecoins have lower Optimal Utilisation Ratio than those with higher liquidity.

DAI

## Rate Strategy Stable Two

High liquidity stablecoins which are callibrated to lower rates to encourage borrow.

SUSD, USDC, USDT, EURS, JEUR, AGEUR

When market conditions change, the interest rate parameters must be changed to adapt to utilisation on Aave’s market as well as to incentives across DeFi.

## Supply rate

You can view the protocol's deposit APY on the Aave App for each asset.

The average Supply APY over a period also includes Flash Loan fees.

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