Interest Rates

Users who borrow from vaults pay interest on their outstanding debts. This interest is then directed to lenders in the vault for their liquidity provision service. By default 10% of accrued borrowing interest is withheld as a fee, which is then split halfway between the vault governor and Euler DAO.

The borrowing rate of a vault is determined by its interest rate model (IRM). These are mathematical functions that take the utilization rate (the proportion of assets that are borrowed) and return the borrowing interest rate at the moment. A common model is the Linear Kink IRM which increases the rate gradually until a target utilization rate (e.g. 80%) is exceeded, after which the rate rises sharply to encourage de-risking behaviors.

The IRM lives as a separate contract outside of the vault. This makes IRM contracts reusable since they are stateless mathematical functions. The vault governor can install a new IRM at any point in time while the EVK has safeguards in place to disable broken IRMs without excessively damaging users.