# Interest rates

Each lending pool has own set of interest rate

All interest rates in Drops are determined as a function of a metric known as the

**utilization rate**. The utilization rate$U_a$

for a money market $a$

is defined as:

$U_a = Borrows_a / (Cash_a + Borrows_a - Reserves_a)$

- $Borrows_a$refers to the amount of$a$borrowed.
- $Cash_a$refers to the amount of$a$left in the system.
- $Reserves_a$refers to the amount of$a$that Drops keeps as profit.

Intuitively speaking, this is the percentage of money borrowed out of the total money supplied.

The borrowing rate's calculation depends on something called an

**interest rate model**- the algorithmic model to determine a money market's borrow and supply rates.Borrow and supply rates are calculated using the utilization rate and several arbitrary constants.

Markets follow what is known as the "Jump Rate" model, which contains the following parameters:

- Base rate per year - the minimum borrowing rate
- Multiplier per year - the rate of increase in interest rate with respect to utilization
- Kink - the point in the model in which the model follows the jump multiplier
- Jump Multiplier per year - the rate of increase in the interest rate with respect to utilization after the "kink"

The borrow rate of the jump rate model is defined as follows:

$\begin{aligned} \text{Borrow Interest Rate} &= \text{Multiplier} * min(U_a, \text{Kink}) \\ &+ \text{Jump Multiplier} * max(0, U_a - \text{Kink}) \\ &+ \text{Base Rate} \end{aligned}$

Last modified 4mo ago