Borrow Interest Rate

Mitigating liquidity risk through the borrow interest rate model

Aave’s interest rate strategy is calibrated to manage liquidity risk and optimise utilisation. The borrow interest rates come from the Utilisation Rate UU.

UUis 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.

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

Interest Rate Model

Liquidity risk materialises when utilisation is high, its becomes more problematic as UU 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 UoptimalU_{optimal} . Before UoptimalU_{optimal} the slope is small, after it starts rising sharply.

The interest rateRtR_tfollows the model:

ifU<Uoptimal:Rt=R0+UtUoptimalRslope1if \hspace{1mm} U < U_{optimal}: \hspace{1cm} R_t = R_0 + \frac{U_t}{U_{optimal}} R_{slope1}

ifUUoptimal:Rt=R0+Rslope1+UtUoptimal1UoptimalRslope2if \hspace{1mm} U \geq U_{optimal}: \hspace{1cm} R_t = R_0 + R_{slope1} + \frac{U_t-U_{optimal}}{1-U_{optimal}}R_{slope2}

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

  • When U<UoptimalU < U_{optimal} the borrow interest rates increase slowly with utilisation

  • When UUoptimalU \geq U_{optimal} the borrow interest rates increase sharply with utilisation to above 50% APY if the liquidity is fully utilised.

Variable loans see their rate constantly evolving with utilisation. This means they are not ideal for financial planning.

Hence stable loans, that maintain their interest rate at issuance until the specific rebalancing conditions are met. For rebalancing the stable rate down, the loans stable rateSSneeds to be greater than the current stable rateStS_t plus a delta equal to 20%: SSt+20%S \geq S_t + 20\%.

For rebalancing the stable rate up, these two conditions need to be met:

  1. Utilisation Rate: Ut>95%U_t > 95\%

  2. Overall Borrow Rate, the weighted average of all the borrow rates: RO<25%R_O < 25\%

Model Parameters

The interest rate parameters have been calibrated per cluster of currencies which share similar risk profiles.

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

The interest rate curve of SNX is much higher than that of other assets due to the staking incentives of the Synthetix platform. This makes SNX the most utilised pool generating the highest yields.

With the rise of liquidity mining, Aave also adapted its cost of borrowing by lowering UoptimalU_{optimal} of the assets affected. This increased the borrow costs that are now partially offset by the liquidity reward.

Following the favorable historical review of liquidity risk, the interest rate models have been optimised to be more competitive while keeping theirs risk mitigation properties.

Variable Interest Rate Model Parameters

Asset

UoptimalU_{optimal}

Base

Slope 1

Slope 2

BUSD

80%

0%

4%

100%

DAI

80%

0%

4%

75%

GUSD

80%

0%

4%

100%

sUSD

80%

0%

4%

100%

TUSD

80%

0%

4%

75%

USDC

90%

0%

4%

60%

USDT

90%

0%

4%

60%

AAVE

BAT

45%

0%

7%

300%

CRV

45%

0%

7%

300%

ENJ

45%

0%

7%

300%

ETH

65%

0%

8%

100%

KNC

65%

0%

8%

300%

LINK

45%

0%

7%

300%

MANA

45%

0%

7%

300%

MKR

45%

0%

7%

300%

REN

45%

0%

7%

300%

REP

45%

0%

7%

150%

SNX

80%

3%

12%

100%

UNI

45%

0%

7%

300%

WBTC

45%

0%

7%

100%

YFI

45%

0%

7%

300%

ZRX

45%

0%

7%

300%

Stable Interest Rate Model Parameters

The stable rate provides predictability for the borrower which comes at a cost, as the interest rates are higher than the variable rate. However the rate of a stable loan is fixed until the rebalancing conditions are met:

  1. Utilisation Rate: Ut>95%U_t > 95\%

  2. Overall Borrow Rate, the weighed average of all the borrow rates: RO<25%R_O < 25\%

The currencies the most exposed to liquidity risk, TUSD, sUSD and BUSD, do not offer stable rate borrowing.

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

Asset

UoptimalU_{optimal}

Base

Slope 1

Slope 2

BUSD

DAI

80%

4%

2%

75%

GUSD

sUSD

TUSD

80%

4%

2%

75%

USDC

90%

4%

2%

60%

USDT

90%

3.5%

2%

60%

AAVE

BAT

45%

3%

10%

300%

CRV

ENJ

45%

3%

10%

300%

ETH

65%

3%

10%

100%

KNC

65%

3%

10%

300%

LEND

80%

3%

10%

300%

LINK

45%

3%

10%

300%

MANA

80%

3%

10%

300%

MKR

45%

3%

10%

300%

REN

SNX

UNI

45%

3%

12%

300%

WBTC

45%

3%

10%

300%

YFI

ZRX

45%

3%

10%

300%

Interest Rate Parameters Change

When market conditions change, risks change. The utilisation of reserves is continuously monitored to check liquidity is available. In case of prolonged full utilisation, the interest rate parameters are adapted to mitigate any risks emerging from market conditions

Date

Asset

Uoptimal

Variable Rate

Stable Rate

Interest Rate Parameters Updates from V1 to V2

Interest Rate Curves

This section shows Aave's interest rate curves per asset.

BUSD | GUSD | sUSD

BUSD Borrow Rate Curve

DAI | TUSD

DAI and TUSD Borrow Rate Curves

USDC | USDT

USDC and USDT Borrow Rate Curves

BAT, ENJ, LINK, MKR, REN, YFI and ZRX Borrow Rate Curves

No stable borrows for CRV, REN and YFI

KNC

KNC Borrow Rate Curves

SNX

SNX Borrow Rate Curve

UNI

UNI Borrow Rate Curves

WETH

WBTC and WETH Borrow Rate Curves

Related Smart Contracts