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Annual Percentage Rate - Technical
Annual Percentage Rates (APR) are set according to a simple algorithmic formula, designed to create a market between borrowers and lenders within a specific asset class. The concept is discussed in detail in the Compound and Aave whitepapers, but the formulas are included here for convenience.
The utilization ratio, which captures the current state of supply versus demand, is calculated as follows for each tier in each asset class:
U = Borrows/(Cash+Borrows)
The interest rates are then set through governance, depending on the specific needs of each asset class. Interest rates are set based on an optimal ratio, O, with a base rate of B, and the slopes M and N, such that:
When U < O, Borrow Rate = B + (U/O) * M
When U >= O, Borrow Rate = B + M + (U-O)/(1-O) * N
A typical value for a well established a1 asset might be O=50%, B = 0.5% , M = 10%, and N=50%. A typical value for such an a2 asset might be O=50%, B = 2.5%, M = 80%, and N=200%. For newer assets, the rate might be set substantially higher. Since the borrower must borrow half of their assets from the a1 pool and half from the a2 pool, their interest rate will be the average of the two pools.
A fee is set for each money market, a portion of which is sent to ASKO's DAO. The sellers interest rate is set as follows, for each tier in asset class:
Lend Rate = (Borrow Rate * U)*(1-fee)