Interest Rate Model

Understanding Nazca.money's Adaptive Equilibrium Interest Rate Model

Nazca.money introduces an innovative approach to interest rates in the DeFi space, diverging from traditional money market models like those of Compound or AAVE. This new model, known as the Adaptive Equilibrium Interest Rate Model, dynamically balances the yield distribution between borrowers and suppliers to achieve an unprecedented level of financial equilibrium in DeFi.

AEIRM

The Model's Zones Explained

1. Arbitrage Zone

In the Arbitrage Zone, the borrower's interest rate is strategically set lower than the supply rate, or even at 0%, as a direct result of compensation from Blast native yield.

The design of this zone encourages arbitrageurs to engage in a borrowing-and-supplying loop, leveraging the low borrowing costs to earn higher returns by supplying the same assets back to the protocol.

This mechanism is designed to increase market activity and liquidity, making the Arbitrage Zone an essential component for stimulating early protocol engagement.

2. Equilibrium Zone (The Expected Norm)

This zone is where the market is expected to stabilize by design. It represents a balanced state of supply and borrow demands, with a gradual rise in interest rates for both parties.

Once the arbitrage opportunities diminish, the market enters the Equilibrium Zone. In this phase, there's a balance between supply and borrow demand.

This zone represents a stable market state where the incentives for arbitrage are reduced, and the market is primarily driven by genuine supply and borrow dynamics. Nazca's goal is to maintain this zone as the standard operating condition, ensuring steady yields and a healthy, sustainable market environment.

3. Jump Zone

In scenarios where market solvency is at risk (due to high borrowing demand or low supply), the protocol shifts its strategy. In the Jump Zone, all native yield generated is directed towards suppliers, with none allocated to borrowers.

This shift causes a sharp increase in both supply and borrowing interest rates, designed to quickly recalibrate the market by encouraging new supplies and curbing excessive borrowing.

This zone acts as a critical safety measure, ensuring the protocol's stability and solvency during market stress conditions.

How native yield is distributed to suppliers and borrowers as utilization raises

Advantages Over Traditional Jump Rate Models

The innovative design of Nazca.money's model offers several key improvements over traditional jump rate models:

Jump Rate Model

• Higher Capital Efficiency: Traditional models often suffer from low capital efficiency, particularly in high utilization scenarios. Nazca.money's model, by dynamically adjusting yield allocations, maintains higher capital efficiency, ensuring better utilization of assets in the protocol.

• Improved Interest Rates for Users: In traditional models, suppliers and borrowers can often experience less favorable interest rates. Nazca.money, by contrast, optimizes rates for both parties, ensuring that suppliers earn reasonable returns even at lower utilizations, and borrowers enjoy lower borrowing costs.

• Responsive and Balanced Market: The Adaptive Equilibrium Interest Rate Model is designed to respond more fluidly to market conditions, maintaining a balanced state between borrowers and suppliers. This results in a more stable and user-friendly market environment, benefiting all participants.