Interest Rate Model

The Core Idea

Vanna does not have a fixed interest rate. Borrowing costs adjust continuously based on a single input: how much of the pool is currently being borrowed. When a pool is mostly idle, borrowing is cheap - the protocol wants to attract borrowers. When a pool is nearly fully lent out, borrowing becomes very expensive - the protocol needs to incentivize repayment and keep liquidity available for withdrawals. This happens automatically. No governance votes, no manual updates. The rate responds to pool state in real time.

Utilization - The Only Input

Every rate calculation starts with the pool’s utilization ratio:

\text{utilization} = \frac{\text{total borrows}}{\text{total borrows} + \text{available liquidity}}

Utilization is a number between 0 and 1. Everything else is a function of this single value.

Utilization	State
0%	Pool is idle - no active borrowing
50%	Half the pool is deployed
80%	Pool is tightening - rate begins climbing
95%+	Near-fully lent - rate becomes expensive
100%	Every asset is borrowed - withdrawals blocked

The Rate Curve

Vanna uses a smooth polynomial curve - not a two-segment “kinked” model with a hard breakpoint. The borrow rate accelerates organically as utilization increases, with the steepest acceleration above 90%.

Borrow APR

120%

80%

40%

0%

80%

gradual

steep
rise

0%25%50%75%100%

Utilization →

Rate stays near-flat below 80% utilization, then accelerates sharply near 90–100%.

The borrow APR is computed as:

\text{Borrow APR} = C_3 \times \left( u \cdot C_1 + u^{32} \cdot C_1 + u^{64} \cdot C_2 \right)

Where u is the utilization ratio (0 to 1) and the constants are:

Coefficient	Value	Role
C₁	0.1	Weight on the linear and 32nd-power terms
C₂	0.3	Weight on the 64th-power term
C₃	3.5	Overall scaling multiplier

How the three terms work

The three terms - u, u^32, and u^64 - behave very differently depending on utilization:

Term	At 50% util	At 90% util	At 99% util
`u × C₁` (linear)	0.050	0.090	0.099
`u^32 × C₁`	≈ 0	0.003	0.073
`u^64 × C₂`	≈ 0	0.001	0.158
Total × C₃ = APR	~18%	~33%	~115%

There is no kink point - no arbitrary breakpoint where the rate suddenly jumps. Acceleration is organic: the high-exponent terms are near zero at low utilization, then rapidly dominate as utilization approaches 100%.

Approximate rate levels

Utilization	Approx Borrow APR
25%	~9%
50%	~18%
75%	~26%
80%	~28%
90%	~33%
95%	~44%
99%	~115%

The Self-Correcting Loop

This design means the pool naturally stabilizes without external intervention:

Utilization rises

More borrowers draw from the pool. The borrow rate increases.

Borrowing becomes expensive

At high utilization, borrowing costs exceed returns for marginal strategies. Borrowers repay or hold off.

Utilization falls

Repayments reduce outstanding borrows. The rate decreases and liquidity becomes available again.

Equilibrium

The pool settles at the utilization where borrow demand and repayment pressure balance - typically in the 70–85% range.

Lending Pools - how utilization is computed from pool state
vTokens - how borrow interest flows into LP yield
Health Factor - what happens when borrowing costs erode account health
Rate Model reference - the full function interface

Introduction

Core Mechanics

Risk & Economics

Infrastructure

Interest Rate Model

The Core Idea

Utilization - The Only Input

The Rate Curve

How the three terms work

Approximate rate levels

The Self-Correcting Loop

​The Core Idea

​Utilization - The Only Input

​The Rate Curve

​How the three terms work

​Approximate rate levels

​The Self-Correcting Loop

​Related

The Core Idea

Utilization - The Only Input

The Rate Curve

How the three terms work

Approximate rate levels

The Self-Correcting Loop

Related