2.3 Interest rate model

Instead of individual providers or borrowers having to negotiate terms and rates, the Flip protocol uses an interest rate model that achieves an equilibrium of interest rates, in each money market, based on supply and demand. Following economic theory, interest rates (the "price" of money) should increase as a function of demand; when demand is low, interest rates must be low and vice versa when demand is high. The utilization index U for each market a unifies supply and demand in a single variable:

$Ua = Borrows_a / (Cash_a + Borrows_a)$

The demand curve is encoded through governance and is expressed as a function of utilization. For example, interest rates on loans may look like the following:

$Borrowing Interest Rate_a = 2.5percent + U_a * 20percent$

The interest rate earned by providers is implicit and is equal to the interest rate of loans, multiplied by the utilization rate.