Problems with Existing Interest Rate Models
1) For borrowers, the largest concern with the “utilization rate” system is the potential negative APRs on their position. In this case, the borrowing rates would be higher than their yields, effectively putting them in a losing position until more lending funds are deposited or borrowers reduce their position. Even with our vault’s debt-ratio rebalancing borrowers may still be at a disadvantage due to low yields and high utilization rates.
2) For lenders, the returns they receive are limited by a linear model that is based entirely on the “utilization rate”. This means that lenders make significant yields on their deposits when borrowing is high, and likewise they earn very little yield when borrowing is low.
In this model, there are three glaring issues:
a) lenders have no means to profit when borrowers are making high yields,
b) lenders earn very little interest when utilization is low, and
c) when utilization is high, this attracts more lending, which quickly diminishes the early lenders’ return.
Steadefi’s Profit Sharing Rates
Our Profit Sharing Rate Model aims to address these issues by:
1) providing a fixed borrowing rate for vault users (borrowers),
2) sharing yields with the lenders.
For Yield Seekers, they will never have to worry about negative APRs on their positions. Instead of relying on low utilization rates to maintain the health of their positions, borrowers’ rates will depend purely on their underlying yield by sharing a small percentage of their profits with lenders.
For Yield Lenders, they now have more exposure to the upside of yields as they receive a tightly controlled portion of the borrowers’ profits. Lending APRs will now rely on three variables: yield amount from the borrowing vault’s underlying protocol, percentage of the profit share from the connected vaults, and the pool’s utilization rate.
Conclusion
Addressing some of the current problems with lending - borrowing “utilization rates”, this profit sharing model is a solution to prevent negative APRs on a vault, while allowing lenders to share in the profits.