Interest rate model

Interest Rate Model

APR, Nominal Interest Rate, Actual Interest Rate

Traditional financial platforms mostly use the day as the time unit. By comparison, Filda uses the block time (3 seconds) as the time unit.

The interest rate on traditional financial platforms is constant during the life cycle of a mortgage. However, the interest rate on FilDA fluctuates based on supply and demand. Both the borrowing interest rate and the supply interest rate might vary in different blocks. Therefore, FilDA's borrowing interest rate/ supply interest rate refers to the rate of each block.

In traditional financial platforms, the interest rate includes nominal interest rate and actual interest rate. Generally speaking, the interest rate that the borrower is informed of is the nominal interest rate, but the actual interest rate is used in accordance with the compound interest when calculating interest.

In FilDA:

Nominal interest rate = Actual interest rate

Annual percentage rate (APR) = interest rate * blocks per year

Blocks Per Year = 10 512 000 = 60/3 * 60 * 24 * 365

Exchange Rate

When lenders deposit HUSD into the money market, it should convert HUSD into fHUSD based on the real-time exchange rate on the platform. This process is named Mint Token.

Lenders can terminate the loan at any time without waiting for the borrowed asset to be returned. When lenders take back their principals and redeem the interest, fUSD that the lenders hold is converted into HUSD based on the real-time exchange rate on the platform.

Where:

exchangeRate = (totalCash + totalBorrows – totalReserves) / totalSupply

And:

totalCash: the amount of DAI that the lender has deposited into the protocol but has not been borrowed yet

totalBorrows: The amount of HUSD that the borrower should repay ( principle + interest)

totalReserves: The total amount of reserves on the platform （Part of the loan interest is retained as platform reserve)

totalSupply: The total amount of cDAI that the lenders can receive

Utilisation Rate

Ua = Borrowsa / (Casha + Borrowsa)

Utilisation rate is a measure that reflects the efficiency of the assets on the platform. That is the percentage of loans in the entire asset pool of the money market.

BorrowingInterestRatea = 2.0% + Ua ∗ 10%

SupplyInterestRatea = BorrowingInterestRatea ∗ Ua ∗ (1−S)

Where 2.0% is the base interest rate and 10% is the multiple factor.

The borrowing interest rate will be dynamically adjusted according to the utilisation rate. S is the pumping ratio of the FilDA platform. For different assets, these interest rate models can be adjusted and configured.

Reserves

In traditional finance, the risk reserve should be derived from the interest income of each loan for any bank/p2p lending.

Comparatively, the reserve is also derived from the interest income of each loan based on the specific reserve factor on FilDA.

That is: totalReservesNew = interestAccumulated * reserveFactor + totalReserves

Borrow Rate

There are two versions of borrow rate on FilDA. Version 1.0 is a linear interest rate model and Version 2.0 is a segmented interest rate model. Version 1.0 is actually a special case of version 2.0.

Version 2.0:

Here is the logic for Version 2.0: When the utilisation rate exceeds Kink, segmented interest model will be applied; otherwise, Version 1.0 is applied.

Currently FilDA adopts a segmented interest rate for HFIL

When utilisationRate <= kink

BorrowRate=BaseRate+UtilisationRate∗Multiplier

When utilisationRate >= kink

BorrowRate=BaseRate+UtilisationRate∗Multiplier+(UtilisationRate−Kink)∗JumpMultiplier

(Kink can be understood as the marginal interest rate, utilisationRate-kink can be understood as the overflow interest rate.)

The above formula can be translated as:

When utilisation rate <= marginal interest rate: Borrowing interest rate = base interest rate + utilisation rate * utilisation rate multiplier

When utilisation rate > marginal interest rate: Borrowing interest rate = base interest rate + utilisation rate * utilisation rate multiplier + marginal interest rate * marginal interest rate multiplier

Where baseRate = The base interest rate.