İnterest Models
On this page we briefly explain all the interest models
Last updated
On this page we briefly explain all the interest models
Last updated
The Open Market Lending system utilizes decentralized finance (DeFi) principles and Web3 technology to offer various interest models, catering to diverse financial strategies within the blockchain ecosystem. This guide provides a clear explanation of each model, common use cases, and scenarios when lenders or borrowers might choose them.
Brief Explanation: Simple interest is calculated only on the original amount of the loan (principal), not on any interest accrued. Common Use Case: Ideal for short-term loans where the borrower needs to know exactly how much interest they will pay. When to Opt:
Lender: When seeking predictable returns with a straightforward interest calculation.
Borrower: When preferring a transparent and easy-to-understand interest structure for short-term borrowing.
Where:
Principal is the initial amount of the loan.
Rate is the annual interest rate expressed in basis points (where 10,000 basis points = 100%).
Example: For a loan of 1,000 ETH at an interest rate of 5% per year:
This calculation demonstrates that for a loan of 1,000 ETH at 5% interest per annum, the borrower would owe 50 ETH in interest after one year
Brief Explanation: Compound interest is interest calculated on the initial principal, which also includes all of the accumulated interest of previous periods of a deposit or loan. This type of interest calculation is crucial for scenarios where the capital increases exponentially over time.
Common Use Case: Compound interest is most beneficial in long-term investments or loans where the interest can grow significantly over time, thus offering greater returns or growth on the initial sum invested.
Lender: Choose compound interest when seeking higher returns over a long period through the effect of compounding. This is especially attractive in long-term loans or investments where the incremental increase in returns can be substantial.
Borrower: Opt for compound interest when planning for long-term loans where you're prepared for interest to accumulate over time, potentially allowing for larger loan amounts due to increased principal.
The CompoundInterest model will only be available on the mainnet due to its requirements for access to other protocols' routers for more complex calculations and interactions.
Where:
P is the principal amount (initial investment or loan amount).
r is the annual interest rate (expressed as a decimal).
n is the number of times interest is compounded per year.
t is the time the money is invested or borrowed for, in years.
Let's calculate the compound interest on a principal of 1,000 ETH with an annual interest rate of 5%, compounded daily for 1 year. Here, the compounding frequency (nnn) is 365 (daily).
Principal (P): 1,000 ETH
Annual Interest Rate (r): 5% or 0.05
Compounding Frequency (n): 365 (daily)
Time (t): 1 year
Using the formula:
This calculation can be broken down as follows:
Calculate the daily interest rate by dividing the annual rate by the number of days in the year:
Raise the sum of 1 plus the daily rate to the power of the total number of compounding periods
Multiply the initial principal by the result to get the final amount and subtract the principal to find the interest earned.
In precise terms and assuming the use of high precision in the calculation, you can expect 51.27 ETH in interest due to daily compounding.
Brief Explanation: Our market-based interest rate feature dynamically adjusts the APR rates by integrating real-time data from oracles of leading platforms. This method ensures that the interest rates on loans and investments closely reflect current market conditions, providing both transparency and competitiveness.
Common Use Case: This feature is ideal for both lenders and borrowers who wish to engage in financial activities that adapt to market fluctuations. It enables the interest rates to be competitive and fair, reflecting the real-time economic environment.
Lender: Opt for market-based interest rates if you prefer your returns to be aligned with current market trends. This choice is particularly beneficial for those who are looking to maximize returns by capitalizing on higher rates when the market dictates, thus potentially enhancing profitability over the investment period.
Borrower: Choose market-based interest rates if you are seeking loan terms that adjust with economic changes. This ensures that you are not locked into rates that may become unfavorable due to shifts in the financial landscape. It also allows for potentially lower interest rates during periods of market downturns.
Dynamic APR Adjustment:
The APR rates for our lending pools are sourced directly from trusted oracles, which continuously gather and update data from top financial platforms. This integration not only ensures accuracy but also adds an extra layer of security by reflecting true market conditions in our interest calculations.
Our system automatically updates the interest rates for new and existing loans based on these feeds, providing a seamless experience that adjusts to global financial trends without manual intervention.
Adaptability and Relevance: The use of dynamic APR rates means that the financial products offered remain relevant and attractive under varying economic conditions. For lenders, this translates to investments that are always optimized for the best possible returns. For borrowers, this ensures fair access to financing that corresponds with the wider financial environment.
Brief Explanation: Flash loans are ultra-short-term loans that must be repaid within the same transaction block, often used for quick, automated financial operations. Common Use Case: Ideal for arbitrage opportunities, collateral swaps, or other quick transactions in DeFi. When to Opt:
Lender: When providing high-risk, instant loans to advanced DeFi users.
Borrower: When needing immediate, collateral-free liquidity for a very brief period to take advantage of market opportunities.
Example: A user borrows 1,000 ETH in a flash loan, uses it for arbitrage between different DeFi platforms, and repays it immediately within the same transaction block.
Brief Explanation: This model reduces the effective interest rate by generating additional earnings from the collateral provided by the borrower, typically through liquidity pools in DeFi. Common Use Case: Useful when the collateral can be actively utilized to generate returns, lowering the overall borrowing cost. When to Opt:
Lender: When offering competitive interest rates by leveraging collateral earnings within DeFi protocols.
Borrower: When seeking lower borrowing costs through interest discounts generated by their collateral's participation in DeFi liquidity pools.
Example: A borrower provides 1,000 ETH worth of collateral. This collateral is used to generate liquidity on a DeFi platform like Balanncer, earning 50 ETH over the loan period. The borrower receives an interest discount equivalent to their share of the 50 ETH earnings.