# Interest Rates

### How Interest Rates Work <a href="#how-interest-rates-work" id="how-interest-rates-work"></a>

Interest rates are determined by **utilization**—the ratio of borrowed assets to supplied assets.

> *Utilization Rate = Total Borrowed / Total Supplied*

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\*Paste Utilization Rate Image here
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When utilization is:

* **Low** — Plenty of liquidity available, rates are low
* **High** — Liquidity is scarce, rates increase to attract suppliers and encourage repayment

This creates a self-balancing system where rates naturally respond to supply and demand.

### The Two-Kink Interest Rate Model <a href="#the-two-kink-interest-rate-model" id="the-two-kink-interest-rate-model"></a>

AlphaFi Lend uses an interest rate model with **two kinks** (inflection points). This creates three distinct rate zones:

<div data-with-frame="true"><figure><img src="/files/ciZoSed9yp3MorbhWPkm" alt=""><figcaption></figcaption></figure></div>

**Zone 1: Low Utilization**

When utilization is below the first kink, rates increase gradually. This zone represents normal market conditions with ample liquidity.

**Zone 2: Moderate Utilization**

Between the first and second kink, rates increase more steeply. This signals that liquidity is becoming constrained and incentivizes action.

**Zone 3: High Utilization**

Above the second kink, rates spike sharply. This aggressive increase:

* Strongly discourages additional borrowing
* Incentivizes rapid repayment
* Attracts new suppliers with high yields

<details open>

<summary>Why two kinks instead of one?</summary>

A two-kink model provides more granular control:

* The first kink provides an early warning as utilization rises
* The second kink triggers emergency-level rates
* This graduated response is more capital efficient than a single sharp transition

It balances capital efficiency during normal conditions with strong protection during stress.

</details>

### Visualizing the Rate Curve <a href="#visualizing-the-rate-curve" id="visualizing-the-rate-curve"></a>

<div data-with-frame="true"><figure><img src="/files/h9FfAh7fp1o4q4fTtGsl" alt=""><figcaption></figcaption></figure></div>

Each asset's detail page displays the Interest Rate Model chart:

* **X-axis** — Utilization rate (0% to 100%)
* **Y-axis** — Interest rate (APR)
* **Current position** — Marked on the curve showing current utilization
* **Optimal range** — The target utilization zone

You can see how rates would change if utilization increases or decreases.

### Supply APR vs Borrow APR <a href="#supply-apr-vs-borrow-apr" id="supply-apr-vs-borrow-apr"></a>

<div data-with-frame="true"><figure><img src="/files/cHCfr6uK9wiMgMacQ8rv" alt=""><figcaption></figcaption></figure></div>

**Borrow APR** is the rate borrowers pay on their loans.

**Supply APR** is the rate suppliers earn, calculated as:

> *Supply APR = Borrow APR × Utilization × (1 - Reserve Factor)*

Key relationships:

* Supply APR is always lower than Borrow APR
* Higher utilization means suppliers earn more (closer to borrow rate)
* The reserve factor takes a portion for protocol reserves

<details open>

<summary>Example: Rate calculation</summary>

If an asset has:

* Borrow APR: 5%
* Utilization: 60%
* Reserve Factor: 15%

Supply APR = 5% × 60% × (1 - 15%) = 2.55%

Suppliers earn 2.55% while borrowers pay 5%.

</details>

### Spread Fee <a href="#spread-fee" id="spread-fee"></a>

The **spread fee** (typically 15-25%) represents the margin between what borrowers pay and what suppliers receive. This covers:

* Protocol reserves for safety
* Operational sustainability
* Buffer against bad debt

### Rate Dynamics in Practice <a href="#rate-dynamics-in-practice" id="rate-dynamics-in-practice"></a>

**When rates increase:**

* More users borrowing an asset
* Suppliers withdrawing liquidity
* Market demand for the asset rising

**When rates decrease:**

* Borrowers repaying loans
* New suppliers adding liquidity
* Reduced demand for borrowing

### Checking Current Rates <a href="#checking-current-rates" id="checking-current-rates"></a>

**On the Markets Table**

<div data-with-frame="true"><figure><img src="/files/GmCZh22bOxZ3GxOhVO7m" alt=""><figcaption></figcaption></figure></div>

* **Supply APR** — What you earn by supplying
* **Borrow APR** — What you pay to borrow
* Fire icon indicates additional incentive rewards

**On the Asset Detail Page**

* Historical APR charts (1W, 1M, 6M, 1Y views)
* Current utilization rate
* Full interest rate model visualization
* Rate parameters and configuration

### APR vs APY <a href="#apr-vs-apy" id="apr-vs-apy"></a>

AlphaFi displays rates as **APR** (Annual Percentage Rate), which does not account for compounding.

Since interest accrues continuously:

* Actual returns/costs may be slightly higher than displayed APR
* The difference is minimal for typical rate levels
* APR provides a clearer, more comparable metric

#### Incentive Rewards <a href="#incentive-rewards" id="incentive-rewards"></a>

Some assets offer additional rewards beyond base interest rates. These appear as boosted APRs with a :fire: icon.

<div data-with-frame="true"><figure><img src="/files/h7F4fgBb1oAjfCOGZUkB" alt=""><figcaption></figcaption></figure></div>

To see the breakdown:

1. Hover over the APR display
2. View base rate vs incentive rewards separately

Incentive programs may change over time based on protocol priorities and governance decisions.


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