# Prime Cash Interest Rate Model

Prime Cash money markets are Notional’s variable rate lending and borrowing markets. You can read more about Prime Cash here.

Prime Cash borrowers accrue interest at a borrowing rate that is determined by the following model:

`Prime Cash Borrow Interest Rate = Prime Borrow Premium + Prime Borrow Interest Rate Fee`

Notional uses a two kink interest rate model to determine the

`Prime Borrow Premium`

borrowers have to pay. Notional's governance can set the following parameters to shape the Prime Cash Borrow Premium interest rate curve:- Kink1 Interest Rate
- Kink2 Interest Rate
- Max Interest Rate
- Kink1 Utilization Rate
- Kink2 Utilization Rate

The

`Prime Borrow Premium`

is a function of the Prime Cash market utilization. A market's Prime Cash Utilization rate is defined as:$utilization Rate= totalPrimeDebtInUnderlying/ totalPrimeCashInUnderlying$

Notional's governance can also set the following parameters to set how much borrowers will have to pay in fees to the protocol's reserves:

- Fee Rate Percent (percentage of the
`Prime Borrow Premium`

) - Min Fee Rate
- Max Fee Rate

The borrower fee is based on the market's Prime Borrow Premium and the Fee Rate Percent. For example, if the current Prime Borrow Premium is 3% and the Fee Rate Percent is 20% then the Prime Borrow Interest Rate Fee will be 0.6% (3% * 20%). The Prime Borrow Interest Rate Fee is added to the Prime Borrow Premium when calculating the borrower's Prime Borrow Interest Rate.

The Min Fee Rate acts as a lower bound on the Prime Borrow Interest Rate Fee that has to be paid by Prime Cash Borrowers. For example, if the Min Fee Rate is 0.5% and the Prime Borrow Premium * Fee Rate Percent is below 0.5% then the Prime Borrow Interest Rate Fee will be 0.5%.

Similarly, the Max Fee Rate acts as a higher bound on the Prime Borrow Interest Rate Fee that Prime Cash Borrowers have to pay.

This spreadsheet model can be used to model the Prime Cash Interest Rate under different parameter assumptions.

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

- Optimize capital efficiency
- Minimize market 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 net 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's reserves while mitigating liquidity risk concerns.

The slope of the Prime Borrow Premium Interest rate curve should also be adjusted for currencies that accrue yield over time such as Liquid Staking Derivatives.

For Prime Cash suppliers to be able to withdraw their tokens from the protocol, Prime Money Markets need to maintain a sufficient amount of liquidity.

To mitigate this risk, Notional's governance can set the Max Interest Rate at a rate that is attractive to potential new lenders and penalizing to Prime Cash borrowers. The kink2 utilization rate parameter can also be used to mitigate liquidity risk concerns by determining the percentage of total liquidity that is available between kink2 utilization and 100% utilization.

Last modified 4mo ago