Interest Rate Model
Design Principle
Interest Rate Model in the 246 Club is designed to intersect between two primary objectives.
Unified Liquidity
Market-based large unified liquidity pool.
Pair Specific Sensitivity
Interest rate sensitively reflects the pair-specific borrow demand.
The Challenge is that in the unified pool, the borrow rate is set by global utilization since asset pairs share the same liquidity.
246 Rate on top of Aave Rate
As a Re-Lending protocol, the Interest rate in the 246 Club applied to Re-Lenders and Borrowers differs from the conventional Lending protocol.
For Borrowers : On top of the Aave borrow rate, borrowers are charged with 246 rate.
For Re-Lenders : On top of the Aave supply rate, re-lenders earn the 246 rate from borrowers.
Thus, the 246 rate solely depends on the utilization of each market in the 246 Club, isolated from Aave's. In other words, the interest rate based on supply and demand dynamics of 246 Club is applied on top of Aave's rate.
Below is how our interest rate model works in tandem with the supply and demand dynamics of 246 Club.
Pair Specific Interest Rate
Each unified pool of each Market consists of a single borrow asset and multiple different collateral*. Regardless of the number of collateral assets against which the borrow asset is exposed, as a unified pool, utilization is calculated by the total borrowed over the total borrowing power delegated in this market.
*More details on Market Structure
For example, in the [aUSDC]USDC Market, the total supply of delegated USDC is 100. Various borrowers have borrowed 20 USDC against Collateral A and 40 USDC against Collateral B. Regardless of the composition of each pair, utilization is calculated by the total borrowed, 50 USDC, over the total borrowing power delegated, 100 USDC, which is 50%.
Each pool regulates supply and demand dynamics based on this global utilization. Therefore, interest rates specific to each pair, within a single market, will have the same interest rate gradient and therefore experience the same rate of change in interest rate as well as optimal utilization.
To make the rates of each pair more specific to the risk-return profile of each pair, 246 Club applies a pair-specific interest rate constant to calibrate the borrow rate for each individual pair. Within the same interest rate gradient per market, each pair is applied with a different constant to have distinct borrow rates.
Still, despite having a pair-specific constant to align the risk-return profile of each pair, the model still lacks sensitivity of pair-specific ‘demand.'
If one pair’s borrow demand increases, the global utilization—and thus the borrow rate for all pairs within the same unified pool—rises accordingly. Ideally, if one pair’s borrow demand increases, that pair’s pair-specific rates experience a shift, while the other pair’s rate stays the same with a slight increase as the global utilization increases.
Our solution is adding pair-specific sensitivity on top of a global utilization-based interest rate model.
Gauging Pair-Specific Demand via Buffer Allocation
Among the two types of caps(Hard and Soft) mentioned on the previous page, Segmented Risk Exposure, Hard Cap represents the maximum borrow limit of that pair; once the Hard Cap is tapped, no more borrowing is permitted.
On the other hand, Soft cap is not a hard restriction on borrowing capacity but rather a gauge of the demand specific to each pair. Pairs not only have their own interest rate curve but are also dynamic in reacting to the demand specific to each pair.
Once the borrowing demand of the pair touches the predetermined Soft Cap, this indicates heightened borrow demand. And so the pair-specific constant shifts upwards.
Increase in pair-specific constant will solely be applied to pairs that have surpassed their Soft Cap and, therefore, will not affect the borrow rate of other pairs. Heightened rates will effectively reflect the demand specific to that pair while leaving other pairs to stay at their own constant and base interest rate.
Example
Consider [aUSDC]USDC market exposed to Collateral A and B within the same unified pool, both with a defined Soft Cap.
Increased borrow demand of Collateral A
With more borrowers now borrowing against Collateral A, the Soft Cap of Collateral A has been surpassed.
Collateral A under Buffer Allocation
Reserved Buffer is allocated to Collateral A, and borrowers pay Buffer Premium on top of Base Rate(Aave Rate + 246 Rate) to further borrow with Collateral A.
Rate of Collateral B
Meanwhile, the rate of Collateral B remains mostly unaffected, as Collateral B has not reached its Soft cap.
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