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DOI: 10.4230/OASIcs.Tokenomics.2022.5

Interest Rate Rules in Decentralized Finance: Evidence from Compound

Authors: Amit Chaudhary, Roman Kozhan, and Ganesh Viswanath-Natraj

Published in: OASIcs, Volume 110, 4th International Conference on Blockchain Economics, Security and Protocols (Tokenomics 2022)

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.

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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)

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@InProceedings{chaudhary_et_al:OASIcs.Tokenomics.2022.5,
  author =	{Chaudhary, Amit and Kozhan, Roman and Viswanath-Natraj, Ganesh},
  title =	{{Interest Rate Rules in Decentralized Finance: Evidence from Compound}},
  booktitle =	{4th International Conference on Blockchain Economics, Security and Protocols (Tokenomics 2022)},
  pages =	{5:1--5:6},
  series =	{Open Access Series in Informatics (OASIcs)},
  ISBN =	{978-3-95977-274-7},
  ISSN =	{2190-6807},
  year =	{2023},
  volume =	{110},
  editor =	{Amoussou-Guenou, Yackolley and Kiayias, Aggelos and Verdier, Marianne},
  publisher =	{Schloss Dagstuhl -- Leibniz-Zentrum f{\"u}r Informatik},
  address =	{Dagstuhl, Germany},
  URL =		{https://drops.dagstuhl.de/entities/document/10.4230/OASIcs.Tokenomics.2022.5},
  URN =		{urn:nbn:de:0030-drops-184226},
  doi =		{10.4230/OASIcs.Tokenomics.2022.5},
  annote =	{Keywords: Cryptocurrency, decentralized finance lending protocols, monetary policy, stablecoins, governance token}
}

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Interest Rate Rules in Decentralized Finance: Evidence from Compound

Abstract

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