What is Borrow Rate?
The borrow rate is the annual percentage rate (APR) that borrowers pay to take out loans from a DeFi lending protocol. This rate is typically variable, changing based on supply and demand dynamics in the lending pool.
How Borrow Rates Work
Interest Accrual:Interest accrues continuously based on the outstanding loan balance. Most protocols compound per-block or per-second.
Variable vs Fixed:- Most DeFi lending: Variable rates
- Some protocols offer fixed rates for premium
Borrow Rate Determinants
Primary Factor: Utilization
- Higher utilization = Higher borrow rate
- Encourages repayment when liquidity is scarce
Secondary Factors
- Asset risk parameters
- Collateral type
- Protocol governance decisions
Interest Rate Model
Typical Curve:```
If Utilization < Optimal:
Rate = Base + (Utilization/Optimal) × Slope1
If Utilization > Optimal:
Rate = Base + Slope1 + ((Utilization-Optimal)/(1-Optimal)) × Slope2
```
Current Typical Rates
| Asset | Low Util | Optimal | High Util |
|---|---|---|---|
| . . . - | . . . . . | . . . . - | . . . . . . |
| USDC | 2-3% | 4-6% | 20-50%+ |
| ETH | 1-2% | 3-5% | 15-30%+ |
| WBTC | 1-2% | 3-4% | 15-25%+ |
Supply Rate Relationship
Supply Rate = Borrow Rate × Utilization × (1 - Reserve Factor)Example: 5% borrow rate, 80% utilization, 10% reserve = 3.6% supply rate
Borrowing Strategies
Minimize Costs
- Borrow when utilization is low
- Monitor rate changes
- Compare across protocols
- Use aggregators like DeFi Saver
Rate Arbitrage
- Borrow cheap on one protocol
- Supply on higher-rate protocol
- Must account for all costs and risks
Risk Management
- Set rate alerts for spikes
- Maintain buffer above liquidation
- Consider rate history and volatility