# Interest Rates

**Interest rate dynamics within the Fringe’s Lending Facility are as follows: **

Borrowers are charged interest on their open positions.

Lenders receive interest on the capital they contribute to the Primary Capital Pool.

### Improved interest rate model

Fringe v2 introduces an improved interest rate model that maximizes the percentage of lender funds being loaned out, thereby increasing revenue for lenders and decreasing costs for borrowers. The new model targets a **utilization rate** (rather than targeting an interest rate based on the utilization rate), striking a balance between liquidity and yield earned on lenders’ capital.

Unlike the old model that used a hard-coded mapping between utilization rates and interest rates, the new model dynamically adjusts interest rates to incentivize lending and borrowing to target an optimal utilization rate. Interest rates are continually reduced when the utilization rate is lower than the target and increased when it exceeds the target. This maximizes the capital efficiency for lenders in so far as it aims to lend out more of the lender asset pool as the dynamic targets the utilization rate.

The interest rate change is limited to a range of -5% and 5% per week, with a maximum change of 5% when the utilization rate is very high. The new interest rate model enhances capital efficiency and profitability for lenders.

In all, Fringe Lending **automatically** adjusts the interest rate charged to borrowers so that a balance occurs to economically incentivize borrowers’ and lenders’ participation in the platform.

When there is high borrower demand, the interest rate they are charged will be algorithmically increased. This will attract more lenders to the platform – who will receive a share of the greater interest charges collected from borrowers.

When there is low borrower demand, the interest rate they are charged will be algorithmically decreased. This will attract more borrowers to the platform.

The term **Utilization Rate** is used to describe demand from borrowers in respect of the proportion of a capital pool that borrowed. A low Utilization Rate will tend to decrease interest rates and a high Utilization Rate will tend to increase interest rates. Each lending market offered by the Fringe Lending Platform will have its own interest rate dynamic according to its Utilization Rate.

As a result of this dynamic of automatically balancing interest rates within Fringe’s variable interest rate offering, there are no deterministic fixed interest rates. The market determines interest rates. This allows Fringe Lending to remain competitive in the crypto economy – since deterministic fixed interest rates would cause the platform to swing into and out of being competitive in relation to other crypto platforms.

Note, however, it is likely that lenders may enjoy higher interest rates for their assets using Fringe Lending as compared to other platforms. This is because Fringe Lending can be a predominant lender for many collateral assets that do not have other well-established lending markets.

Fringe’s variable interest rate model is designed for capital efficiency, whereby excess lender capital tends to decrease borrower interest rates to attract more borrowers. Conversely, high borrower utilization will tend to increase interest rates to attract more lenders. There is no direct correlation of utilization rate and interest rate. Interest rates will trend higher or lower depending on the prevailing utilization rate vs the target utilization rate.

The model calculates interest rates based on the following variables:

**InterestRate**: The current interest rate.**CurrentUtilizationRate**: The percentage of total lender funds currently borrowed.**TargetUtilizationRate**: The desired percentage of lender funds to be borrowed.**GainFactor**: A factor used to determine the adjustment rate of the interest rate.**JumpGain**: An additional factor applied when the current utilization rate exceeds the target.**AnnualBorrowerInterestRate**: The annualized interest rate used for calculating accruals.**PreviousInterestRate**: The value of the annual borrower interest rate calculated the last time the calculation was run.**TimeElapsed**: The number of years since the last calculation.**InterestRateChange**: The annual change in the borrower interest rate.**Error**: The difference between the current utilization rate and the target utilization rate, expressed in percentage points.

When running the model:

If the CurrentUtilizationRate is less than the TargetUtilizationRate:

InterestRateChange = Error × GainFactor

Otherwise (if the CurrentUtilizationRate is greater than the TargetUtilizationRate):

InterestRateChange = Error × GainFactor × JumpGain

The **interest rate** is then calculated as:

AnnualBorrowerInterestRate =

PreviousInterestRate + (TimeElapsed × InterestRateChange)

The interest rate change is confined to a change of -5% and 5% per week. Below the target utilization rate, the interest rate changes are negative; with linear and proportional increments up to the target utilization rate. Beyond the target utilization rate, the interest change per week increases linearly at a higher rate until it hits a change of 5% when the utilization rate is 100%.

To note: the governance parameters mentioned here are indicative only. Fringe governance will from time-to-time adjust the target utilization rate and maximum interest rates change to find the optimum balance of configuration. Once this balance is found, Fringe intends to ossify these governance parameters as part of Fringe's drive to governance minimization and further decentralization.

Last updated