# Interest Rate Model

Paddle's interest rate strategy is calibrated to manage liquidity risk and optimize utilization. The borrow interest rates come from the Utilization Rate U.

U is an indicator of the availability of capital in the pool. The interest rate model is used to manage liquidity risk through allocating user incentivizes to support liquidity:

* When capital is sufficient: low interest rates to encourage loans.
* When capital is scarce: high interest rates to encourage repayments for loans and additional supplies.

## **Normal Model** <a href="#normal-model" id="normal-model"></a>

The supplying rate's calculation depends on something called an **interest rate model** — the algorithmic model to determine a money market's demand and supply rates.

This interest rate model takes in two parameters:

* Base rate per year, the minimum borrowing rate
* Multiplier per year, the rate of increase in interest rate with respect to utilization

**Borrow Rate**

\= Base + Multiplier x Utilization Rate

**Supply Rate**

\= Borrow Rate x (1-Reserve Factor) x Utilization Rate

## Jump Rate Model <a href="#jump-rate-model" id="jump-rate-model"></a>

Liquidity risk materializes when utilization is high, its becomes more problematic as U gets closer to 100%. To tailor the model to this constraint, some markets follow what is known as the "Jump Rate model”. This model has the standard parameters:

* Base rate per year, the minimum demand rate
* Multiplier per year, the rate of increase in interest rate with respect to utilization

but it also introduces two new parameters:

* Kink, the point in the model in which the model follows the jump multiplier
* Jump Multiplier per year, the rate of increase in interest rate with respect to utilization after the "Kink"

**Borrow Rate**

\= Base + Multiplier x Min(Utilization Rate, Kink) + Jump Multiplier x Max(Utilization Rate - Kink, 0)

**Supply Rate**

\= Borrow Rate x (1-Reserve Factor) x Utilization Rate

{% hint style="info" %}
Currently all the markets are designed as Jump Rate Model.
{% endhint %}

## Latest Interest Rate Table

<table><thead><tr><th>Chain</th><th width="204.17578125">Market</th><th width="191.5999755859375">Interest Rate Model</th><th>Base</th><th>Multiplier</th><th>Kink</th><th>Jump Multiplier</th><th>Reserve Factor</th></tr></thead><tbody><tr><td>Berachain</td><td>Bullas/WBERA</td><td>Jump Rate Model</td><td>5%</td><td>25%</td><td>70%</td><td>250%</td><td>12.5%</td></tr><tr><td>Berachain</td><td>Steady Teddys/WBERA</td><td>Jump Rate Model</td><td>5%</td><td>25%</td><td>70%</td><td>250%</td><td>12.5%</td></tr><tr><td>Berachain</td><td>Yeetard/YEET</td><td>Jump Rate Model</td><td>5%</td><td>25%</td><td>70%</td><td>250%</td><td>12.5%</td></tr></tbody></table>

<figure><img src="https://2598324410-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F19xIy3TDlGbl0adHSqRo%2Fuploads%2F3CMEKB0FnS0aFymQREG8%2Fimage.png?alt=media&#x26;token=71c68643-9300-4617-8148-e645c7b36109" alt=""><figcaption></figcaption></figure>


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