Interest Rates

The Red Bank operates with a standard two-slope interest rate model (see Fig. 7). Pioneered by Aave and Compound, this model is battle-tested and widely used throughout DeFi. It works by targeting a certain utilisation rate (amount borrowed / amount deposited). Then, a curve is derived and implemented that aims to discourage utilisation past the optimal level by a sharply increasing slope, i.e. a sharply increasing interest rate.

This means at a certain point, it can becomes incrementally more expensive to borrow a certain to engage in leveraged activities. At the same time, higher interest rates means higher yields for borrowers. Ideally, the two-slope interest rate model encourages utilization to return back to optimal rates.

These parameters reflect the perceived riskiness of the asset in question and is determined by the Martian Council using the asset listing risk framework. See the next page on risk parameters to learn more about interest rate parameters for specific assets