Interest Rate Model

Interest Rates (APY) & Utilization

Provident's interest rate algorithm is calibrated to manage liquidity risk and optimize utilization. The borrow interest rates are derived from the utilization rate U.

U is an indicator of the availability of capital within the pool. The interest rate model manages liquidity risk in the protocol through user incentives to support liquidity:

• When capital is available: low-interest rates to encourage borrowing

• When capital is scarce: high-interest rates encourage debt repayments and additional supply of capital

Interest Rate Model

Liquidity risk materializes when utilization is high, and this becomes more problematic as U gets closer to 100%. To tailor the model to this constraint, the interest rate curve is split into two parts around an optimal utilization rate $U_{optimal}$. Before $U_{optimal}$the slope is small, after it begins rising sharply.

Since these aspects of the Radiant smart contracts are influenced by Aave, please refer to their documentation for calculations of APY: