As Sovryn grows and the market evolves, it is important that we regulary revisit our lending rates and ask ourselves if these settings are (still) working in our favor or if we should rather change them. To which extent do the rates drive borrowing and lending interest and which of the sides do we need to incentivize more strongly?

At this moment, new XUSD borrowers pay a rate of 15.81% and lenders receive 10.21% plus liquidity mining rewards in SOV. We’re looking at a utilization rate of roughly 75%. This means, 75% of all supplied XUSD are currently borrowed and generating interest.

Question we should answer are:

- What is the optimum utilization rate? The higher the rate, the higher the yield for the lenders, but if gets too high, it results in a liquidity bottleneck, limiting the opening of new positions and preventing lenders to withdraw their funds from the pool.
- What is required to incentive lending?
- How high can the interest be and still be considered acceptable?

While we do not have the capacities in-house to perform a detailed study, we could orientate ourselves towards other succesful protocols, such as Aave. @Ponjinge performed an analysis of the Aave lending rates:

Aave is using much lower rates than we do at the moment. If we focus on the stable coin pools, Aave is using a base rate of 0 %, a multiplier of 4%, a target utilization rate of 80-90% and afterwards a multiplier of 60-100%. The formula can be looked up on the document shared above. Our XUSD pool is using a base rate of 6%, a multiplier of 15%, a target utilization rate of 75% and scale up to 150% afterwards.

If we would have been using the Aave curve until now, the current borrowing rate would be 3% instead of 15.81%. Only if the desired utilization rate is exceeded, the rate would increase drastically. Of course, this would result in lower yield for the lenders.

What are your thoughts on interest rates? What do you think is the optimum?