Interest Rate Model
The formula a lending protocol uses to set borrowing and lending rates from pool utilization.
An interest rate model is the curve mapping a pool’s utilization rate to its interest rates. Most use a “kinked” design: rates rise gently as utilization climbs, then steeply past an optimal point (often ~80–90%) to strongly incentivize repayment and fresh deposits before the pool runs dry.
These models are pure code and fully transparent — anyone can compute the exact rate at any utilization. They’re also a governance lever: DAOs tune the curves to balance capital efficiency against withdrawal safety. Understanding the kink explains DeFi’s occasional rate explosions, when a borrowing surge pushes a pool past its optimal point and rates leap overnight.