How to design Lending Model
Fortress Lending is a lending mode built on AVIS testnet and automatically completed through smart contracts. Fortress Lending built a series of capital pools based on the algorithmically derived interest rate of supply and borrow. Suppliers and borrowers gain or pay interests through direct contract interaction. Fortress Lending contains a transparent, checkable ledger that records all transactions.
Lending contract aggregates the liquidity from all users. Once users provide liquidity to Lending contracts, users can obtain some revenues. The revenue is the accumulation of interests during this period, and this method will promote sufficient liquidity. User can withdraw their assets without waiting for the maturity date unless all assets in the pool are borrowed.
Lending contract allows users to obtain mining qualifications to build mining nodes at a lower cost by paying 1% transaction fee to borrow from the pool. The borrowing period is the same as the mining period, and the contract will set the mining period right as collateral. Similar to supplying an asset, each money market has a floating interest rate, set by market forces, which determines the borrowing cost for each asset.
Assets held by the contract are used as collateral to borrow from the contract. Users can get the income generated by mining during the borrowing period. Users can participate in mining at the current loan interest rate.
Lending contract will put 7% of borrowing into reserves to ensure the safety of suppliers’ assets.
Interest Rate Model
Rather than individual suppliers or borrowers having to negotiate over terms and rates, the Lending contract utilizes an interest rate model that achieves an interest rate equilibrium based on supply and demand. Following economic theory, when demand is low, interest rates should be low, and vise versa when demand is high. The utilization ratio for each market unifies supply and demand into a single variable.
The demand curve is codified through governance and is expressed as a function of utilization rate.
Interest rate movement
As can be seen from the above formula, as long as the capital utilization rate changes, the interest rate will correspondingly change. The capital utilization rate is affected by suppliers and borrowers.
Lending contract is defined by an interest rate, which is suitable for all borrowers’ borrowing contracts and will be adjusted by the changes of times and the relationship between supply and borrow.
each time transactions are made, the capital utilization rate index will be updated, and the interest will be calculated from the last index through the way of compound interest. The period interest is calculated using blocks as units and is calculated at the interest rate of each block.
The total lending balance will be updated, including the interest calculated from the last index. Part of interest is kept (reserved) as reserve, which is determined by the reserve fund factor.
The contract does not guarantee liquidity; instead, it relies on the interest rate model to incentivize liquidity. In periods of extreme demand for an asset, the liquidity of the Lending pool will decline; when this occurs, interest rates rise, incentivizing supply but disincentivizing borrowing.