Floating-Rate Markets

Summary

Floating rate markets allow users to either borrow or lend using a variable interest rate without a predefined maturity. The interest rate is based on an underlying mechanism computed based on the utilization of the lent assets in the market. This is a standard design like other DeFi lending and borrowing protocols with floating/variable rate mechanisms (Aave, Morpho, Compound, etc.).

Spot-Rate Borrowing & Lending

Each floating-rate market is setup based on a debt asest which borrowers can borrow by overcollateralizing their position with a specified collateral token (with an associated LLTV and oracle setup).

Borrowers and lenders which interact with floating-rate markets are borrowing or lending at a spot rate which does not have a maturity. Lenders supply a debt asset to the market. These assets can be borrowed by users who overcollateralize a debt position (which can be subject to liquidation, see Liquidations). Interest accrues to the borrower continuously and is updated dynamically based on the utilization of the vault (how much of the lent assets are borrowed). Borrowers can then repay anytime to unlock their collateral. Lenders are minted vault tokens to represent their deposit in the market. These vault tokens accrue in price based on the borrowing rate. Lenders can withdraw/exit their lending position conditional to the market having enough liquidity.

Borrowing Example

A user borrows 1000 USDC from a floating-rate market by depositing 0.5 ETH as collateral which is worth $1500 at the time of deposit (the LLTV of the market is 0.86). Over a 3-month course, the interest rate accrued to the user is volatile and has accrued an average of 12% APR over the duration of the loan. This means the user has accrued 40 USDC worth of borrowing interest to be repaid, making a total of 1040 USDC to be repaid for unlocking the collateral. Once paid, the borrower retains his collateral.

Lending Example

The lending experience is different from the borrowing experience as they are not directly matched 1:1 with borrowers and therefore have exposure to many users' positions. As a result, at any time, the lenders' current APR is measured as follows:

$$Lend_{APR}=Borrow_{APR}\times Utilization$$

Where $Utilization$ is the percent of supplied debt assets from lenders which are borrowed and $Borrow_{APR}$ is the current borrow rate. The average lending rate therefore depends on both the borrowing rate (which depends on utilization, see Floating IRM) and the average utilization.

For example, if the current borrowing rate is 10% and the utilization is 90%, the lending rate is 9%. Likewise, lending rates are always below borrowing rates given utilization is less than 100% (all lent assets are borrowed).