> For the complete documentation index, see [llms.txt](https://docs.tydro.com/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.tydro.com/ii.-core-concepts/interest-rates.md).

# Interest Rates

How borrower and lender interest rates are determined

### Utilization

Utilization is the share of supplied liquidity that is currently borrowed. When most of the supplied asset is borrowed, utilization is high. When little is borrowed, it is low.

The supply rate responds to utilization in every market, which keeps borrowing and supply in balance and preserves liquidity for withdrawals. Whether the borrow rate moves with utilization depends on the market's rate model of Fixed or Variable.

### Fixed borrow rate model

The kBTC / USDC market uses a flat interest rate. The borrow rate is constant across all utilization levels: it does not climb as more of the pool is borrowed, and there is no kink. A borrower locks a known cost and keeps it, with no maturity date and no rollover cost. The rate changes only through governance decisions that are implemted through a timelock.

This differs from a standard variable pool: the borrow rate is fixed and the supply rate floats with utilization. A borrower sets the cost up front and chooses when to exit.

#### Supply rate

Suppliers earn from the interest borrowers pay. The supply rate is the borrow rate scaled by utilization, after the reserve factor share is removed. Suppliers earn more as more of the pool is in use, and less when liquidity sits idle. Even in a market with a fixed borrow rate, the supplier yield still moves with changes in capital utilization.

Because of the flat borrow rate in Tydro V2, suppliers earn more at all levels below the optimal utilization level. 

It rises as utilization rises and stays below the borrow rate. At 0% utilization the supply rate is zero. Because the launch market holds the borrow rate at a fixed level rather than starting near zero, the supply rate earns from the first dollar borrowed — at low utilization it can sit above what a standard kinked curve would pay at the same utilization.

### The variable model

Tydro also supports the standard Aave linear model for markets that use a variable borrow rate. The borrow rate follows two slopes that meet at a target utilization point called the kink.

* **Slope 1** — applies below the optimal utilization point. Rates rise gradually as utilization increases.
* **Optimal utilization (kink)** — the target utilization the model is tuned around.
* **Slope 2** — applies above the kink. Rates rise steeply to discourage further borrowing and protect withdrawal liquidity. At 100% utilization no liquidity remains available for withdrawal; Slope 2 exists to push utilization back toward the target before that point is reached.

Below the kink, borrowing stays relatively cheap. Once utilization passes the kink, the second slope raises rates sharply, which drives utilization back toward the optimal target.

### Rate accrual

Interest accrues on a continual basis (per block) and is represented by an increasing aToken balance.

### Parameters

| Parameter                  | Description                                                                          |
| -------------------------- | ------------------------------------------------------------------------------------ |
| Rate model                 | Flat (fixed borrow rate) or kinked (variable).                                       |
| Fixed borrow rate          | Af fixed interest rate across utilization levels.                                    |
| Base rate                  | Y-intercept of Borrow rate at 0% utilization, set to 0 in standard variable markets. |
| Slope 1                    | Rate slope below the kink, for variable markets.                                     |
| Optimal utilization (kink) | Target utilization where the slope changes, for variable markets.                    |
| Slope 2                    | Rate slope above the kink, for variable markets.                                     |
| Reserve factor             | Share of interest routed to the protocol reserve.                                    |

Per-market values are in the Markets interface at [app.tydro.com](https://app.tydro.com). Rate parameters can be changed through governance. See [Protocol Governance](/ii.-core-concepts/protocol-governance.md) for more details on market management.


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