This documentation is a work in progress!
Any Kresko Asset can be configured with a variable interest rate model on active borrow positions. Configuration is done per-asset with the resulting interest rate also referred to as the Stability Rate. This capability exists for similar purposes as with money markets like Aave or Compound, where the interest rates control the demand and supply for an asset market by enforcing certain dynamics.
- AMM < Oracle -> Higher interest rates.
- Higher interest rates -> More repays -> +AMM price.
- AMM > Oracle -> Lower interest rates.
- Lower interest rates -> More shorting -> -AMM price.
Generally lending markets need to optimize for the utilization rate of supply to ensure a good user experience. During low demand and/or high supply a lower interest rate induces utilization by cheaper borrowing while controlling supply growth with lower yields. Conversely, during times of high demand and/or low supply a higher interest rate induces repayment of borrowed capital while supporting supply growth with higher yields.
In the Kresko protocol, supply is created on-demand so it does not share the same needs. What is shared is the need to direct liquidity out from an imbalanced state, which is why interest rates exist within the Kresko protocol as well.
The protocol needs an efficient AMM to exist with prices close to the core protocol oracles. To support this coupling, the interest rates derive from the difference between the AMM TWAP and the oracle price within the protocol.
Resulting interest rates will be higher when the AMM price is lower than the oracle price. This incentivizes closing excess short positions which drove the AMM price lower in the first place. Users who anticipate and try to front-run this movement will further increase the effect.
Interest rates will be lower when the AMM price is higher than the oracle price, incentivizing new supply and short positions to lower the AMM price.
The interest rates are configured and accounted for per-asset. It can thus be repaid per-asset and also as a batch for all positions. All interest calculations use the outstanding Kresko Asset debt but convert the accrued interest into equal amount of KISS for interest payment itself.
The interest payments are further used to support price stability with possibly funneling part as incentive to liquidity providers, ensuring it remains desirable regardless of the present rates.