How Do Smart Contracts in Decentralized Lending Protocols Determine Interest Rates?
In decentralized lending protocols, interest rates are typically determined algorithmically based on supply and demand. A smart contract manages a pool of assets where users can lend or borrow.
The interest rate for a specific asset is a function of the utilization rate ⎊ the ratio of borrowed assets to the total assets in the pool. As more assets are borrowed, the utilization rate increases, and the smart contract automatically raises the interest rate to incentivize more lending.
Conversely, as loans are repaid, the rate decreases to encourage borrowing.
Glossar
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.
Interest Rates
Rate ⎊ Within cryptocurrency derivatives, rate dynamics significantly influence option pricing and hedging strategies, particularly concerning perpetual futures and synthetic instruments.
Decentralized Lending Protocols
Architecture ⎊ These systems are built upon self-executing smart contracts deployed on decentralized ledgers, forming the core operational framework for lending and borrowing activities.