# Interest Rate Model

## Interest Rates (APY) & Utilization

Radiant's interest rate algorithm is calibrated to manage liquidity risk and optimize utilization. The borrow interest rates are derived from the utilization rate U.

U is an indicator of the availability of capital within the pool. The interest rate model manages liquidity risk in the protocol through user incentives to support liquidity:

* When capital is available: low-interest rates to encourage borrowing
* When capital is scarce: high-interest rates encourage debt repayments and additional supply of capital

## Interest Rate Model

Liquidity risk materializes when utilization is high, and this becomes more problematic as U gets closer to 100%. To tailor the model to this constraint, the interest rate curve is split into two parts around an optimal utilization rate $$U\_{optimal}$$. Before $$U\_{optimal}$$the slope is small, after it begins rising sharply.

<figure><img src="/files/JHLvezDmp6UaI2Q2oEB4" alt=""><figcaption></figcaption></figure>

Since these aspects of the Radiant smart contracts are influenced by Aave, please refer to their documentation for further details of the interest rate model:

{% embed url="<https://docs.aave.com/risk/liquidity-risk/borrow-interest-rate>" %}


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