Interest Rate Model

Rheofi employs a Jump Rate Model to dynamically adjust interest rates based on market utilization. This model balances capital efficiency with protocol safety by incentivizing optimal liquidity levels across all markets.

Utilization Rate

The utilization rate represents the proportion of supplied assets currently being borrowed in a given market. It is calculated as:

$U = \frac{\text{Total Borrows}}{\text{Total Supply}}$

A higher utilization rate indicates that more of the available liquidity is in use, while a lower rate signals excess idle capital.

Supply and Borrow Rate Calculations

Interest rates for both suppliers and borrowers are derived from the utilization rate. Suppliers earn interest proportional to the borrow rate scaled by utilization, minus a reserve factor retained by the protocol. Borrowers pay rates that increase as utilization rises, reflecting the growing scarcity of available liquidity.

The borrow rate below the kink is calculated as:

$R_{\text{borrow}} = R_{\text{base}} + U \times R_{\text{multiplier}}$

Where $R_{\text{base}}$ is the base rate, $U$ is utilization, and $R_{\text{multiplier}}$ is the rate slope.

Kink Point Mechanism

The Jump Rate Model introduces a kink point — a utilization threshold beyond which borrowing rates increase sharply. Below the kink, rates rise gradually with utilization, promoting efficient capital use. Above the kink, a steeper jump multiplier is applied:

$R_{\text{borrow}} = R_{\text{base}} + U_{\text{kink}} \times R_{\text{multiplier}} + (U - U_{\text{kink}}) \times R_{\text{jump}}$

This mechanism discourages extreme utilization, ensuring that a buffer of available liquidity remains for withdrawals and liquidations. The kink is typically set between 70% and 90% utilization depending on the asset's risk profile and liquidity characteristics.

Governance may adjust model parameters — including the base rate, multiplier, jump multiplier, and kink point — through Rheofi Improvement Proposals (RIPs) to respond to changing market conditions.