Interest Rates - AtomicLoans/atomicloans-rfc GitHub Wiki

Interest Rate Model

Custom Loan Fund

If a lender chooses to deploy funds in a custom loan fund, they can choose their own interest rate.

Non-Custom Loan Fund

Lenders and borrowers who choose to create a non-custom loan fund participate in the global protocol interest rate model. Rather than have lenders and borrowers negotiate over the interest rate on a per loan basis, the Global Interest rate of the Atomic Loans protocol enables a dynamic interest rate based on the supply and demand of the borrowers and lenders. However, this interest rate model is different than other protocols in the Ethereum space such as Compound, since it accounts for peer to peer loans that are fixed rate and fixed term, with an interest rate that is able to change by a set threshold daily.

U = Borrowed / Supplied

Fixed rate, fixed term peer to peer loans following a common interest rate model should follow economic theory with the simple premise where increased demand correlates to higher interest rates, and increased supply correlates to lower interest rates. However this interest rate calculation should take into account the inflexibility of the demand side with regards to loans being fixed term. With this in mind, the protocol implements an interest update delay (for example 1 day). This allows the interest rate to change based on supply and demand, without having a massive impact on the exact timing in which borrowers request a loan. The current change in utilization ratio is expressed as the delta between interest update delays, similar to the following:

ΔU = U Today - U Yesterday

The demand curve is set within the protocol (and can be updated if necessary by the Atomic Loans team for the beta version of the protocol). An example supply interest rate may resemble the following:

Supply Interest Rate Today = min(20%, max(2.5%, Supply Interest Rate Yesterday + ((min(10%, abs(ΔU)) / 10) * sgn(ΔU))))

The model assumes a floor (2.5%) and ceiling (20%) interest rate, with a maximum change in rate per interest update period (in this case, a maximum of 1% interest rate change with 10% change in utilization ratio)

The borrowing interest rate is a function of the supply interest rate, and includes a fee (0.75% APR), which represents a profit for the arbiter:

Borrowing Interest Rate Today = Supply Interest Rate Today + Fee Interest Rate