@mishaner

Interest rate models in lending protocols (e.g., Aave, Compound) adjust rates based on utilization but vary in sensitivity to volatility. Aave’s kink model, with a 80% utilization threshold, reacts sharply to demand spikes, causing 5–10% rate swings. Compound’s linear model offers smoother adjustments but risks liquidity crunches. Data shows volatile markets trigger 3x higher rate volatility in kink models versus linear ones. Adaptive models, incorporating real-time volatility indices, could stabilize rates. However, over-sensitivity may discourage borrowing, while under-sensitivity risks insolvency. Balancing responsiveness with stability is key to protocol resilience.

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