Interest Rate Model

In Bend, the interest rate you pay as a borrower is set by an Interest Rate Model (IRM) chosen when the market is created. The only IRM used for Bend markets is the AdaptiveCurveIRM. It differs from typical pool IRMs in two ways:

1. Immutable: The model cannot be changed or upgraded. It must respond automatically to market conditions, including rates on other platforms.
2. Higher target utilization: Supplied assets in Bend are not used as collateral, so markets don’t need to hold large buffers for liquidations. The protocol can target higher utilization and use gentler illiquidity penalties.

The AdaptiveCurveIRM keeps utilization near 90%. In the short term it avoids utilization drifting too low or too high; over time the rate adapts to market conditions. Two mechanisms work together:

• The Curve Mechanism
• The Adaptive Mechanism

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The Curve Mechanism

This mechanism resembles the interest rate curves commonly found in traditional lending protocols. The curve is defined by the following features:

Image provided by Morpho Docs

Each time you (or any user) interact with the market—e.g. borrow or repay—utilization changes and the rate updates along the curve. For instance, the following are sample utilization-to-rate relationships: The Curve Mechanism is designed to respond to short-term fluctuations in utilization, helping maintain healthy market liquidity during periods of sudden borrowing or repayment.

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The Adaptive Mechanism

This mechanism continuously shifts the curve to adjust to market conditions over time. The curve shifts over time so the rate adapts to market conditions even when no one is borrowing or repaying.

Image provided by Morpho Docs

The adaptive mechanism dynamically shifts the rate curve in response to changing market conditions, even during periods without user interaction. The key value that moves the curve is $r_{90\%}$—the rate at the target utilization. This value gradually changes over time:

• If utilization rises above the target (90%), $r_{90\%}$ will steadily increase.
• If utilization falls below the target, $r_{90\%}$ will steadily decrease.

The pace at which $r_{90\%}$ moves is recalculated whenever the market is updated (such as through borrowing or repaying). The greater the gap between current and target utilization, the faster $r_{90\%}$ (and thus the whole curve) moves in the appropriate direction. Example: if utilization stays at 100% for five days, $r_{90\%}$ can roughly double in that period (at maximum speed).

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Formula breakdown

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Utilization

Utilization ($u(t)$) is the ratio of total borrowed assets to total supplied assets at time ($t$), with a constant utilization target ($u_{\text{target}} = 0.9$).

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Error

Error ($e(u)$) is the normalized difference between the current utilization ($u(t)$) and the target utilization ($u_{\text{target}}$), scaled so that the distance between $u_{\text{target}}$ and $u = 1$ equals the distance between $u_{\text{target}}$ and $u = 0$. $$\forall t, \quad e(u) = \begin{cases} \dfrac{u(t) - u_{\text{target}}}{1 - u_{\text{target}}}, & \text{if } u(t) > u_{\text{target}} \\ \dfrac{u(t) - u_{\text{target}}}{u_{\text{target}}}, & \text{if } u(t) \le u_{\text{target}} \end{cases}$$

Image provided by Morpho Docs

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Curve

Curve ($curve(u)$) determines the shape and sensitivity of the interest rate response to changes in utilization around the target, with different slopes below and above $u_{\text{target}}$ controlled by the constant $k_{\text{d}}$. $$\text{curve}(u) = \begin{cases} \left(1 - \dfrac{1}{k_d}\right) \cdot e(u) + 1, & \text{if } u \le u_{\text{target}} \\ \left(k_d - 1\right) \cdot e(u) + 1, & \text{if } u > u_{\text{target}} \end{cases}$$ with $$k_d = 4$$

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History of interactions

History of interactions ($H$) represents the set of all past interaction times up to time ($t$), including the initial time ($0$). Noting that $t_{\text{i}}$ the time at which $i\text{th}$ interaction occurred. $$\forall t, \quad H(t) = \{0\} + \{t_i\}_{t_i < t}$$

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Last interaction

Last interaction ($last$) represents the most recent interaction time before or at time ($t$). $$\forall t, \quad \text{last}(t) = \max(H(t))$$

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Speed

Speed factor ($speed$) determines how fast the interest rate changes over time based on the error at the last interaction, scaled by ($k_\text{p}$). $$\forall t, \quad \text{speed}(t) = \exp\!\left(k_p \cdot e(u(\text{last}(t))) \cdot (t - \text{last}(t))\right), \quad \text{with } k_p = 50$$

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Rate at target

Rate at target ($r_{\text{target}}$) represents the interest rate when utilization equals the target utilization, evolving over time based on the speed factor. $$\forall t > 0, \quad r_T(t) = r_T(\text{last}(t)) \cdot \text{speed}(t)$$ At any time ($t$), the borrow rate ($r$) is given by the formula: $$r(t) = r_T(t) \cdot \text{curve}(u(t))$$

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Calculations

APY is the annualized return for suppliers and cost for borrowers, with compounding. In Bend you use it to compare returns and costs across markets.

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Borrow APY

The Borrow APY is calculated using the following formula: $$\text{borrowAPY} = \left( e^{(\text{borrowRate} \times \text{secondsPerYear})} - 1 \right)$$ Where:

• borrowRate is the borrow rate per second, as determined by the Interest Rate Model (IRM).
• secondsPerYear represents the total number of seconds in a year (31,536,000).

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Supply APY

The Supply APY is calculated considering the utilization and the fee. The formula is: $$\text{supplyAPY} = \text{borrowAPY} \times \text{utilization} \times (1 - \text{fee})$$ Where:

• fee is the fee of the market on a per-market basis and portion of the interest paid by borrowers that is retained by the protocol. See Yield & Fees for more details.
• utilization is calculated as:

$$\text{utilization} = \frac{\text{totalBorrowAssets}}{\text{totalSupplyAssets}}$$

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Constants

The values of the following constants are hardcoded into the Morpho code deployed on Berachain.

• WAD = Wei-based Decimal (WAD = 10^18, meaning 1 WAD = 1.0)