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# Borrow Interest Rate

Mitigating liquidity risk through the borrow interest rate model
The design concept of D2D's lending rate model comes from aave.
D2D's interest rate strategy is calibrated to manage liquidity risk and optimise utilisation. The borrow interest rates come from the Utilisation Rate
$U$
.
$U$
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.

## Utilisation Rate

In kyoko,currency reserve is characterised by its utilisation rate
$U$
:
$U = TotalBorrows \quad / \quad TotalLiquidity$
$U$
monitors which share of the reserve’s total capital is borrowed at time tt monitors which share of the reserve’s total capital is borrowed at time
$t$
.
As
$U$
gets closer to 100%, the capital becomes scarcer until no more liquidity is available when
$U = 100\%$
. This situation can be problematic if depositors wish to withdraw their liquidity, but no funds are available.
Still high utilisation results in high returns for depositors. Its therefore essential to maximise utilisation while protecting liquidity.
The interest rate model is calibrated around an optimal utilisation rate
$U_{optimal}$
per reserve that reflects market conditions.
Since kyoko provides a large amount of liquidity in the early stage, and also Kyoko will strictly control the entry for loans applicants. It is almost impossible for the utilization rate to reach the optimal rate, so the borrower interest will be maintained at a relatively low level in the most cases.

## Interest Rate Model

Liquidity risk materialises when utilisation is high, its becomes more problematic as
$U$
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
$U_{optimal}$
. Before
$U_{optimal}$
the slope is small, after it starts rising sharply.
The interest rate
$R_t$
follows the model:
$if \hspace{1mm} U < U_{optimal}: \hspace{1cm} R_t = R_0 + \frac{U_t}{U_{optimal}} R_{slope1}$
$if \hspace{1mm} U \geq U_{optimal}: \hspace{1cm} R_t = R_0 + R_{slope1} + \frac{U_t-U_{optimal}}{1-U_{optimal}}R_{slope2}$

## Model Parameters

In Kyoko D2D loans, we will only provide stable coins as the lending asset, and currently Kyoko only support USDT. We offer very low interest rates to our borrowers, as long as they pass our evaluation review process.
USDT Variable Interest Rate Model Parameters:
Params
Value
$U_{optimal}$
90%
Base
2%
Slope 1
4%
Slope 2
60%

## Interest Rate Curves

This section shows USDT's APY. ​
USDT Borrow Rate
USDT ReserveInterestRateStrategy Contract: