Interest Rate Rules in Decentralized Finance: Evidence from Compound

Chaudhary, Amit; Kozhan, Roman; Viswanath-Natraj, Ganesh

doi:10.4230/OASIcs.Tokenomics.2022.5

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Document Identifiers

DOI: 10.4230/OASIcs.Tokenomics.2022.5
URN: urn:nbn:de:0030-drops-184226

Author Details

Amit Chaudhary

Warwick Business School, University of Warwick, Coventry, UK

Roman Kozhan

Warwick Business School, University of Warwick, Coventry, UK

Ganesh Viswanath-Natraj

Warwick Business School, University of Warwick, Coventry, UK

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Amit Chaudhary, Roman Kozhan, and Ganesh Viswanath-Natraj. Interest Rate Rules in Decentralized Finance: Evidence from Compound. In 4th International Conference on Blockchain Economics, Security and Protocols (Tokenomics 2022). Open Access Series in Informatics (OASIcs), Volume 110, pp. 5:1-5:6, Schloss Dagstuhl – Leibniz-Zentrum für Informatik (2023)
https://doi.org/10.4230/OASIcs.Tokenomics.2022.5

Abstract

We study the fundamentals of interest rate rules on the decentralized finance protocol Compound. Interest rates are set by the governance of the protocol, and are based on the utilization of an asset: which is the ratio of a cryptocurrency that is borrowed to its total supply in the protocol. We discuss factors that determine the slope parameters of interest rate rules. Slope parameters are typically higher for more volatile cryptocurrencies. We argue liquidation risk can explain the cross-sectional variation in interest rate rules. We also draw parallels between these rules to the demand for loanable funds in traditional money markets.

Subject Classification

ACM Subject Classification

Applied computing

Keywords

Cryptocurrency
decentralized finance lending protocols
monetary policy
stablecoins
governance token

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References

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