Lending and Borrowing Rates on Compound

    Compound is a decentralized, ethereum-based protocol that allows borrowing and lending of crypto assets. Interest rates on compound are floating and are set by market forces.

    How do these change over time?

    The history of each interest rate, for each market, is recorded by an index. Each time a transaction occurs, the interest rate for the asset is updated to compound the interest since the prior index using the interest for the period.

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    What impacts these rates?

    We can see from the charts above that on March 7, 2021, there was a reduction in supply but an increase in demand causing borrowing and lending rates to move from (6.86%, 0.66) to (28.70%, 13.39) respectively. Thus, borrowing and lending rates increase as a function of demand. When demand is low, rates are low, and vice versa when demand is high.

    Using the UNI market on Compound as sample market for analysis:

    How are Lending and Borrowing rates determined?

    Borrowing rates are determined using the formula - 2.5%+Ua*20%. Where Ua is the utilization ratio for a market (a) which unifies supply and demand in a single variable. The lending rate is computed by multiplying the borrowing interest rate by the Utilization value of the market.