How Do Smart Contracts Automate Interest Rate Calculation and Payment Schedules?
The smart contract code contains the logic for calculating the interest rate, often algorithmically based on the liquidity pool's utilization rate. It automatically accrues the interest in real-time on the borrower's debt.
The contract enforces the payment schedule by allowing the borrower to repay at any time, but calculating the exact accrued amount due instantly. No manual administrative process is required for tracking or billing.
Glossar
Interest Rate Calculation
Model ⎊ Interest Rate Calculation in decentralized finance protocols is governed by an algorithmic model embedded within the smart contract, determining the borrowing and lending rates for various crypto assets.
Interest Rate
Yield ⎊ Interest rate, within cryptocurrency derivatives, represents the cost of capital or the return on an underlying asset utilized in constructing a derivative position, impacting pricing models and arbitrage opportunities.
Payment Schedule
Schedule ⎊ A Payment Schedule specifies the predetermined dates and amounts for the transfer of funds between counterparties in a financial contract, particularly relevant in over-the-counter derivatives like swaps or structured products.
Payment
Settlement ⎊ Payment within cryptocurrency, options trading, and financial derivatives represents the actual transfer of value, typically digital assets or fiat currency, to fulfill contractual obligations arising from a trade or contract execution.