Interest Rate Models
How interest rate models work in Mirai
Mirai protocols archeticure is based on a Plug and Play model. Any kind of interest model can be used. Mirai does focus on the "Kink based interest model"
Kink based Model
The kink-based interest model is a mechanism that combines the kink model with a variable interest rate. The basic idea behind this model is to incentivize borrowers to borrow at low collateralization levels (below the kink point) by offering them a lower interest rate. As the collateralization level increases (above the kink point), the interest rate increases as well. This is designed to encourage borrowers to maintain a healthy level of collateralization, while still allowing them to access loans at a lower interest rate when they are able to provide more collateral.
how it works:
Borrowers can borrow assets by providing collateral to the lending protocol.
If the value of the collateral is below the kink point, the interest rate for the loan is relatively low. This is intended to encourage borrowers to provide more collateral, since they can access loans at a lower interest rate.
As the value of the collateral increases above the kink point, the interest rate for the loan increases as well. This is intended to encourage borrowers to maintain a healthy level of collateralization, since they will be charged a higher interest rate if they fail to do so.
Additionally there are variations such as flash loan and dynamic kink which uses the same logic with minor variations
This model is a way of aligning the interests of borrowers and lenders, since borrowers are incentivized to maintain a healthy level of collateralization, which in turn reduces the risk for lenders. It's also a way of promoting liquidity on the lending protocols since borrowing assets at low interest rate encourages borrowers to collateralize assets.
At the moment we have decided on 4 Kink Models
Last updated