Interest Rate Curves

For assets where demand is strong enough to justify enabling users to borrow the asset and to list fCash markets, one must select the initial interest rate curve parameters using the following model.

Prime Cash Market

Interest Rate Curve

The main objectives when setting Prime Cash Interest Rate Curve parameters are to:

  • Optimize capital efficiency

  • Minimize liquidity risk

For a Prime Money Market to be capital efficient, its interest rate model has to allow borrowers to borrow until utilization reaches an optimal level. Optimal utilization is often set at the Kink2 Utilization Rate and Kink2 Interest Rate such that the Prime Cash borrow rate allows borrowers to borrow up to the optimal utilization rate. The Kink2 utilization rate and Kink2 interest rate should also be adjusted as a function of a market's borrowing demand elasticity. Optimal utilization increases the Prime Supply rate for lenders and generates fees for the protocol while mitigating liquidity concerns.

The interest rate curve should also increase rapidly at high utilization rates (above kink2 utilization) to ensure part of the supply is always redeemable. To do so, the curve's maxRate has to be set relatively high.

fCash Markets

Max Market Index

fCash markets should always be listed with a max market index of 2. New assets will only be tradable in the 3M and 6M maturities. Enabling longer-dated markets should be done after the asset has been active for some time to gauge the interest in the market and in long-dated maturities.

Deposit Shares

Deposit shares dictate the amount of liquidity allocated to the 3M and 6M markets. Usually, deposit shares are set to either allocate 50% of the liquidity to each pool or slightly more to the 3M market since short-dated maturities have historically attracted more trading volume.

Interest Rate Curves

Considerations similar to the Prime Cash Curve also apply to the fCash interest rate curves.

Leverage Thresholds

Leverage thresholds dictate the maximum utilization rate at which the nToken account can provide liquidity to each liquidity pool by market index. If during the course of minting nTokens, a liquidity pool’s utilization is greater than its leverage threshold, the nToken will lend to that liquidity pool instead of providing liquidity.

Leverage thresholds are usually set at the kink2 utilization rate. The Kink2 interest rate is usually the maximum rate at which the protocol anticipates rational market participants to borrow. Based on the selected leveraged thresholds, one can also simulate the nToken maximum drawdown to validate that the nToken account can never become undercollateralized.

Initial Trading Proportions

Initial trading proportions should usually be set between the kink1 utilization rate and kink2 utilization rate at a rate that is in line with the asset's current variable rate on other markets.

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