Interest Rates
How interest rates are programatically determined in Solera's lending markets
Interest Rate Models
Main Market: Linear Interest Rate Curve with Kink Beyond Optimal Utilization
The interest rate model operates in two phases on a linear curve determined by the utilization rate (U ) and Optimal Utilization Point (U_Optimal):
Below U_Optimal – Borrow rates rise moderately as utilization increases, promoting lending while maintaining affordable borrowing costs.
Above U_Optimal – Borrow rates climb steeply to prevent liquidity crises and discourage excessive borrowing.
This design maintains sufficient liquidity for withdrawals while optimizing capital efficiency. The variable model increases an asset's interest rate dramatically near full utilization to encourage new deposits and/or discourage additional borrowing to preserve liquidity reserves.
The system relies on several core parameters:
Optimal Utilization Rate (U_optimal) – Target utilization before steep rate increases begin
Base Variable Borrow Rate – Minimum borrowing cost at near-zero utilization
Variable Rate Slope 1 – Linear increase rate before U_optimal
Variable Rate Slope 2 – Linear increase rate after U_optimal
Isolated Markets: Adaptive Interest Rate Curve Developed by Morpho
Solera's Morpho Vaults and Markets utilize the adaptive Interest rate curve developed by Morpho Labs. For detailed information including calculations see https://docs.morpho.org/overview/concepts/irm/
Borrow and Supply APY
The Annualized Percentage Yield (APY) standardizes interest rates over a one-year period by accounting for compounding. In the context of lending protocols, two key APYs are:
Borrow APY: This reflects the effective annual interest cost that borrowers incur. It is derived from the instantaneous interest rate provided by the chosen Interest Rate Model (IRM). The Borrow APY tells borrowers how much they will pay on an annual basis for borrowing funds.
Supply APY: This indicates the effective annual yield that lenders receive on their supplied assets. It is derived from the variable Borrow APY, the market's utilization rate and any applicable fees.
Additional liquidity incentives and rewards applied to specific markets and assets can further increase supply rates or decrease borrow rates beyond the base APY.
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