Interest Rates

How Varla's interest rate model works — a kinked utilization curve that incentivizes optimal pool utilization.

✦ Key Takeaways

Kinked curve — rates rise slowly below optimal utilization, then sharply above it
Per-second accrual — interest compounds continuously via a global borrow index
Floating rates — both supply and borrow APY update with every protocol interaction
Reserve factor — 10% of borrow interest goes to protocol reserves

The Kinked Rate Model

The model uses two slopes separated by a kink point (optimal utilization). Below the kink, rates rise gently to encourage borrowing. Above the kink, rates spike to incentivize repayment and new supply.

utilization = totalBorrows / totalAssets

If utilization ≤ optimalUtilization:
  borrowRate = baseRate + (utilization / optimal) × slope1

If utilization > optimalUtilization:
  borrowRate = baseRate + slope1 + ((utilization - optimal) / (1 - optimal)) × slope2

supplyRate = borrowRate × utilization × (1 - reserveFactor)

Default Parameters

Parameter	Value	Description
Base Rate	2%	Minimum borrow rate at 0% utilization
Slope 1	4%	Rate increase per unit utilization below kink
Slope 2	75%	Steep rate increase above kink
Optimal Utilization	80%	Kink point where slope changes
Reserve Factor	10%	Portion of borrow interest to reserves

Example Rates

Utilization	Borrow APY	Supply APY
0%	2.0%	0.0%
40%	4.0%	1.44%
80% (kink)	6.0%	4.32%
90%	43.5%	35.2%
95%	62.3%	53.3%
100%	81.0%	72.9%

Above 80% utilization, rates spike dramatically. This is by design — it creates strong incentives for borrowers to repay and for new lenders to supply, ensuring the pool doesn't become fully utilized (which would block lender withdrawals).

Accrual Mechanics

Interest accrues per-second. Every time someone interacts with the pool (supply, borrow, repay, withdraw, liquidate), the global borrow index is updated:

timeDelta = now - lastUpdate
ratePerSecond = borrowRateAPY / SECONDS_PER_YEAR

newIndex = oldIndex × (1 + ratePerSecond × timeDelta)

// Each borrower's actual debt:
actualDebt = scaledDebt × newIndex

This means interest compounds automatically — borrowers don't need to take any action, and lenders see their share value grow in real time.

Use readPoolSnapshot() from the SDK to get current utilization, borrow APY, and supply APY. See TypeScript SDK.