How Does Algorithmic Interest Rate Adjustment Impact Lenders and Borrowers in DeFi?
Algorithmic interest rate adjustment creates a dynamic and responsive lending market. For borrowers, rates increase as demand for an asset grows, making borrowing more expensive and discouraging excessive leverage.
For lenders, higher rates during peak demand mean higher returns on their supplied assets, incentivizing them to add more liquidity. This automated balancing mechanism helps to stabilize the lending protocol by ensuring that liquidity is adequately supplied to meet borrowing demand.
However, it also introduces variability, as both lenders and borrowers are subject to fluctuating rates.
Glossar
Rate Adjustment
Adjustment ⎊ This action involves the systematic modification of interest rates, funding rates, or premium decay calculations used within derivatives pricing or margin calculations.
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 Rate Volatility
Dispersion ⎊ Interest rate volatility, within cryptocurrency derivatives, reflects the anticipated magnitude of fluctuations in benchmark interest rates impacting the pricing of instruments like futures and swaps.
Interest Rate Adjustment
Mechanism ⎊ Interest rate adjustment is the algorithmic mechanism in decentralized lending protocols that automatically modifies the borrowing and lending rates in response to changes in the pool's utilization rate.
Automated Balancing Mechanism
Algorithm ⎊ The core of an Automated Balancing Mechanism is a set of predefined, self-executing rules designed to maintain a target state within a financial system, often seen in decentralized finance.