As the personal debt risk situation of Curve founder Michael Egorov continues to develop, more and more discussions are centered around the Fraxlend interest rate issue.
This is because Fraxlend uses a special interest rate adjustment mechanism, which has caused the loan interest rate in the CRV/FRAX market within Fraxlend to rise rapidly for most of the time from yesterday to now, "forcing" Egorov to repay $7.13 million of debt on the platform this afternoon.
So, how is Fraxlend's interest rate calculated? Why can the number rise so quickly? Combining the official documentation of Frax Finance and the tweet explanation of its developer Drake Evans, we briefly sorted out this algorithm.
First, according to the documentation of Frax Finance, Fraxlend uses three different interest rate change algorithms for different markets:
Linear interest rate: Simply put, it is a basic algorithm where the interest rate increases linearly with market utilization.
Time-weighted variable rate: An algorithm that determines interest rate increases or decreases based on market utilization and adjusts the interest rate at fixed time intervals.
Variable Rate V 2: A composite algorithm that combines the first two, using a linear interest rate function to determine the current interest rate, but also using the time-weighted variable rate formula to adjust the maximum interest rate.
OK, you may think this explanation is even more vague, don’t worry, let’s continue.
According to Drake, Fraxlend’s CRV/FRAX market uses the second algorithm (i.e., time-weighted variable rate), which works as follows:
First, Fraxlend sets a target utilization range for a specific market. When the market utilization rate is within this range, the interest rate does not need to change.
When market utilization is lower than the target range, the interest rate will be gradually reduced by a certain multiplier at specific intervals until it reaches the lowest interest rate.
When market utilization is higher than the target range, the interest rate will gradually increase by a certain multiplier at specific intervals until it reaches the minimum interest rate.
This specific duration is called half-life in Fraxlend's design, which refers to the time it takes for the interest rate to halve when the market utilization rate is 0, and the time it takes for the interest rate to double when the market utilization rate is 0.
According to the contract of the CRV/FRAX market, the target utilization range is 75%-85%, the minimum interest rate is 0.5%, the maximum interest rate is 10000%, and the half-life is 12 hours.
This means that for the CRV/FRAX market:
When market utilization is in the 75%-85% range, no rate change is required.
When market utilization is below 75%, the interest rate will gradually decrease by a certain "multiplier" every 12 hours until it reaches 0.5%.
When market utilization is above 85%, the interest rate will gradually increase by a certain "multiplier" every 12 hours until it reaches 10,000%.
Therefore, for quite a long time from yesterday to now, as the overall utilization rate of the CRV/FRAX market in Fraxlend continued to be higher than 85%, even close to 100%, the loan interest rate of the pool continued to rise.
However, this does not mean that the interest rate in this market will double every 12 hours and reach 10,000% in three and a half days as some rumors say (this statement comes from Delphi Digital, but in fact Delphi Digital only lists the situation of 100% utilization rate, and does not say that it is the general situation after exceeding 85%), because in reality, the utilization rate of this market does not continue to remain at 100% (this is also impossible to achieve), so the "multiplier" mentioned above is not always 2 times.
According to Drake’s additional introduction, when the utilization rate of the CRV/FRAX market exceeds 85%, the interest rate increase multiplier will be different for each level of utilization.
As shown in the figure above, when the market utilization rate is 85%, the "multiplier" is 1, which means that the interest rate will remain unchanged; but as the utilization rate increases, the "multiplier" will gradually increase; until the utilization rate reaches 100%, the "multiplier" will become 2, which means that the doubling growth begins as Delphi Digital said.
Currently, with Egorov's repayment, the utilization rate of the CRV/FRAX market has dropped to 53.68%, which means that if this situation continues, the interest rate will drop further after 12 hours. In this way, Egorov's pressure will be greatly reduced.
Therefore, it is not difficult to understand why Egorov wants to replace part of Fraxlend’s debt in advance. At least the interest rate must be lowered first, otherwise it will not be able to sustain the rising range.