Liquidity Risks

Liquidity and Borrow Interest Rate

Overview

The Rhombus Protocol is a decentralized, non-custodial liquidity protocol that enables users to supply and borrow various cryptoassets from liquidity pools, earning interest on supplied assets. The liquidity of the protocol is a critical metric, representing the availability of assets for operations such as borrowing backed by collateral and redeeming supplied assets along with accrued interest.

At any given time, the protocol's liquidity can be assessed through the Utilization Ratio, which is the proportion of the reserve currently borrowed compared to the total supply of each asset. Liquidity risk is managed through the borrow interest rate model and alternative sources of aToken liquidity.

Borrow Interest Rate Model

The Rhombus Protocol's interest rate model is designed to manage liquidity risk and optimize asset utilization. The borrow interest rates are calculated using the Utilization Rate U, an indicator of the availability of capital within the liquidity pool.

How It Works

• When capital is available: Low interest rates are applied to encourage borrowing.

• When capital is scarce: High interest rates are used to incentivize repayments and additional supplying.

To retrieve the interest rate strategy contract on-chain, refer to the developer documentation.

Interest Rate Formula

The interest rate curve is divided into two segments based on an optimal utilization rate Uoptimal​. The model follows these rules:

$$R_t = \begin{cases} \text{if } U \leq U_{\text{optimal}} & \quad R_0 + \frac{U_t}{U_{\text{optimal}}} R_{\text{slope1}} \\[1em] \text{if } U > U_{\text{optimal}} & \quad R_0 + R_{\text{slope1}} + \frac{U_t - U_{\text{optimal}}}{1 - U_{\text{optimal}}} R_{\text{slope2}} \end{cases}$$

Actual Borrow Rate

In practice, the calculateCompoundedInterest method is used, with an approximation that mostly impacts high interest rates. The actual borrow rate is given by:

$$\text{Actual APY} = \left(1 + \frac{\text{Theoretical APY}}{\text{secs per year}}\right)^{\text{secs per year}} - 1$$

• When U ≤ Uoptimal​: Borrow interest rates increase slowly with utilization.

• When U > Uoptimal​: Borrow interest rates increase sharply, reaching over 50% APY if liquidity is fully utilized.

Both the variable and stable interest models are derived from the formula above, with different parameters for each asset.

Model Parameters

The interest rate parameters are tailored to manage liquidity risk and market conditions effectively. They are calibrated based on the following key factors:

1. Collateral Usage: Volatile assets need constant liquidity for liquidations.

2. Market Conditions: Borrowing costs must align with market opportunities to prevent arbitrage.

Interest Rate Strategies for Markets

The interest rate strategies for markets have been deployed with three distinct models, each calibrated for clusters of assets with similar risk profiles.

Rate Strategy KAIA

Designed for native asset and its LSTs that require consistent liquidity.

• Assets: KAIA, stKAIA, wgcKLAY

• Parameters:

  Parameter	Value
  Optimal Usage	90%
  Base Variable Borrow Rate	0
  Variable Rate Slope 1	4%
  Variable Rate Slope 2	104%
  Base Stable Borrow Rate	N/A
  Stable Rate Slope 1	N/A
  Stable Rate Slope 2	N/A
  Optimal Stable to Total Debt Ratio	20%

Rate Strategy Stable One

For low liquidity stablecoins, calibrated for lower optimal utilization.

• Assets: USDT, USDC

• Parameters:

  Parameter	Value
  Optimal Usage	80%
  Base Variable Borrow Rate	0
  Variable Rate Slope 1	4%
  Variable Rate Slope 2	104%
  Base Stable Borrow Rate	N/A
  Stable Rate Slope 1	N/A
  Stable Rate Slope 2	N/A
  Optimal Stable to Total Debt Ratio	20%

Rate Strategy Variable Major

For high liquidity variable tokens, encouraging borrowing with lower rates.

• Assets: ETH

• Parameters:

  Parameter	Value
  Optimal Usage	60%
  Base Variable Borrow Rate	0
  Variable Rate Slope 1	4%
  Variable Rate Slope 2	104%
  Base Stable Borrow Rate	N/A
  Stable Rate Slope 1	N/A
  Stable Rate Slope 2	N/A
  Optimal Stable to Total Debt Ratio	20%

Supply Rate

The borrow interest rates paid by borrowers are distributed as yield for aToken holders who supply to the protocol, excluding a portion reserved for the ecosystem treasury. The supply APY, St, is calculated as:

$$S_t = U_t \left( \frac{S_{B_t}}{S_t} + \frac{V_{B_t}}{V_t} \right) (1 - R_t)$$

Where:

• Ut: Utilization ratio.

• SBt: Share of stable borrows.

• St: Average stable rate.

• VBt: Share of variable borrows.

• Vt: Variable rate.

• Rt: Reserve factor.