Simulating Interest Rates
This article explores the use of an interest rate model to simulate the impact of large deposit and borrow events on Aave.
What An Interest Rate Simulation Shows
An interest rate simulation shows how rates will change if a large deposit occurs or if a large amount is borrowed. This information helps users to understand the sensitivity of market rates and can help users to plan deposits and manage risk. For example, a simulation can tell you if the supply APR will decrease dramatically if you were to make a large deposit.
The table below shows an illustrative simulation using a historical Aave V3 USDT market state.
| Deposit Simulation | Supply APR | Borrow APR | Utilization |
|---|---|---|---|
| Current | 4.26% | 5.32% | 88.94% |
| after $100.0M deposit | 4.10% (-0.15%) | 5.11% (-0.43%) | 75.39% |
| after $250.0M deposit | 3.82% (-0.29%) | 4.80% (-0.74%) | 53.09% |
| after $500.0M deposit | 3.52% (-0.42%) | 4.48% (-1.09%) | 44.81% |
| after $1.00B deposit | 3.02% (-1.24%) | 3.62% (-1.95%) | 34.95% |
How The Calculations Work
It is possible to simulate the onchain mechanism which sets the supply APR and borrow APR for a given market state. Using a set of parameters, known as the interest rate model, we can calculate how sharply rates will increase as more or less assets are borrowed from the lending pool.
We can use the exact same parameters and calculations as those contained within the Aave lending contracts in order to simulate rate changes with precision.
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Inputs:
- U - current utilization (borrowed / supplied).
- Curve - a function mapping the utilization to the borrow rate, using the optimal utilization and slope parameters.
Practical Considerations
- Simulations show theoretical outcomes that may be invalidated in practice. For example, a large borrow could push interest rates up only for them to be brought back down again by new deposits soon after. With that understanding, the value of the interest rate simulation is to give a sense of the market state and configuration, not to predict lasting outcomes.
- Interest rates are driven by market behaviour which is determined by many external factors. Some participants respond immediately and automatically when rates deviate from benchmarks.
- Interest rate parameters can change frequently while the Aave team is managing risk and incentives, especially during volatile market periods.
- Interest rates reflect the instantaneous rewards for supplying in a market and do not account for bonus rewards from liquidation fees and compounding.
Where To Access The Data
The underlying inputs for these simulations, including live and historical rate model parameters, are available from Aavescan on a custom basis by request. If your team needs interest rate simulations for research, reporting, or integrations, contact Aavescan to discuss access.
Practical Uses
- Preview the rate impact of a planned deposit or borrow.
- Estimate how much headroom for borrows and withdrawals remains before rates increase sharply.
- Understand the sensitivity of the market configuration in comparison with other markets.
Disclaimer: Information provided is educational and not financial advice. Always conduct your own research before using DeFi platforms.