Dynamic Triple-Slope Interest Rate Model
We are excited to unveil a novel dynamic triple-slope interest rate model for Beta Finance. We believe this model is a significant improvement over the existing model, and brings us closer to accurately balancing incentives for borrowing long tail assets. The contract for the dynamic triple-slope interest rate model is now available here, and we will be having a $1,000 — $10,000 bug bounty on any high or critical severity bugs found, as detailed on ImmuneFi!
Built for Volatile Borrowing
With the recent activity on Beta Finance, we have noticed some issues with the existing interest rate model.
- Borrowing of long tail assets for shorting is concentrated around shorter time periods
- Interest models separated by risk profiles only do not capture differences in activity
Since one of our main features is enabiling users to initiate short positions on long tail tokens, we see that the duration of borrowers is concentrated more heavily on temporary borrowing activity relative to stablecoin borrowing. This results in cycles of spikes in borrowing activity in a short period, followed by a return to normalcy in activity.
The current interest rate model was initially designed for utilization rates to stabilize within the optimal range of 70–80%. However due to the periodic spikes of short-lived borrowing demand, utilization rates in these markets do not sustain the targeted optimal range, which depresses the interest rates. And when the periodic spikes happen, the current model does not react fast enough, preventing further lending activity from occuring.
Another issue we identified is that although tiering exists to distinguish risk profiles of lending markets, there is a need to further distinguish markets based on activity consistency. For example, stable tokens, e.g. stablecoins usually have more consistent borrowing demands due to price stability than long tail assets with inconsistent borrowing demands.
To tackle these issues we introduce a new interest rate model, utilizing a dynamic triple-slope interest rate curve. There are 3 core features of this model:
- Customizability: Each bToken (interest-bearing token) will now have it’s own individual configuration. For example, we can now customize the target range per token, rather than for each set of tokens.
- Dynamicity: Interest rates can be adjusted up and down automatically based on the utilization rate and the duration the utilization rate stays constant at that value.
- Triple-slope: The triple-slope model introduces a middle portion of the curve that remains constant, so borrowing rates do not fluctuate within the middle range. This allows the interest rate to react more aggressively to high or low borrowing demands much faster than the current model.
Understanding the Curve
Let’s walk through an example to explain the model by looking at the USDC money market. We will be using example parameters that do not reflect the finalized configuration. Final numbers and configurations for each market will be analyzed separately and selected to fit each of the market’s conditions.
The figure above is marked by green and red-dotted lines to indicate the maximum upwards shift and minimum downwards shift of the interest rate curve. When the utilization rate is high, the minimum possible value (green line) for the interest rate will ensure the borrowers are paying at a high interest rate, and the rate will increase the longer this utilization rate is consistent until it reaches the maximum possible value (red line). This effectively caps the interest rate within a range at all utilization levels, rather than fix the interest rate at a specific value for each utilization rate.
Additionally, we configure the optimal utilization rate range of bUSDC to be 70% — 80%. This mirrors existing behavior where interest rate decreases below the target range and increases outside of it. However, we allow for the optimal utilization rate range to be modified for each corresponding money market. This means while the bUSDC market has an optimal range of 70% — 80%, the bSHIB market may have an optimal range of 20% — 30%.
Bounty Program
The smart contract for the dynamic triple-slope interest rate model is now available publicly for review here. We will be providing a $1,000 to $3,000 reward for disclosure of significant bugs or attack vectors present in the code that result in theft of funds and/or loss of user funds. As always, the full details of our active bug bounty program can be found on ImmuneFi.
Conclusion
The introduction of the new dynamic triple-slope interest rate model will allow for more efficient market activity for lenders and borrowers across all money markets, including long tail assets. Interest rates will now be:
- More reactive to diverse borrowing profiles of all assets
- More effective at incentivizing lending activity and properly valuing borrowing activity
- More scalable for the addition of long tail asset markets
We would like to thank the buildooooors at Alpha Venture DAO for their consultation and feedback when developing the interest rate model.
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