Compound Borrow & Supply APY
@scottincrypto
Compound is a defi deposit & lending protocol, built for developers. Lenders can deposit capital and earn yield on the deposit, and borrowers can take out collateralised loans against their deposits at a variable interest rate. Compound operates a number of different markets and users can deposit into one market and borrow from a different one.
Borrowing and lending rates are different for each market. The interest rate in each market is determined by a curve based on the utilisation of the liquidity in the pool for that market. The utilisation of the pool is the ratio of borrowed capital to supplied capital. Compound generates revenue by charging a higher rate on the borrow side of the market.
The graph below (borrowed from this notebook on Observable) is a typical borrow rate curve for the Dai market. Supply curves follow the same principle. Note the sharp increase in rate as the pool utilisation goes over 80%. This is the mechanism by which liquidity is managed in the pool. As the quantity of borrowed funds approaches supplied funds, interest rates rise on both the supply and borrow side. The higher rates on the supply side incentivise new liquidity into the pool, and the higher borrow rates penalise borrowers and encourage deleveraging.
Dai Market
USDT Market
USDC Market
COMP Market
ZRX Market
BAT Market
wBTC Market
UNI Market
ETH Market
SAI Market
Data sourced from FIipside Crypto
Data Sources:
https://api.flipsidecrypto.com/api/v2/queries/6f35585c-ec2d-4286-9659-1e7df58556f0/data/latest
wBTC Market
UNI Market
wBTC Market
UNI Market
The shape of the curve - the slope of each line and the inflection point - are determined by the current liquidity in the pool and reserves held by the market. Dive into the technical details at the excellent notebook on Observable.
The graphs below show the Borrow & Supply APYs plotted over the last 90 days, along with the Market Utilisation. The USDT market in particular shows the effect of the inflection point in the rate curve, when Utilisation drops following the market crash in May 2021.
Typical Dai Market Borrow Rate Curve (utilisation vs borrow APY)