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.