Interest Rate Model 4

Interest Rate Model 4 governs USDT and MIM.

Popular Stablecoins

Interest rate model four governs two other popular stablecoins: USDT and MIM. USDT and MIM have higher risk adjusted interest rates, compared to USDC and FRAX. Lodestar is monitoring the situation with USDT's transparency campaign, and changes to USDT's model could be made in the future pending any disclosures. MIM is a riskier stable coin by nature, being partially backed by non-stable assets.

Suppliers

Supply rates on these assets will remain close to parity with USDC on the portion of the curve with a utilization ratio from 0-80%, above 80% this curve will rapidly increase to incentivize more suppliers to come into the market.

USDT Supply Rates

Borrowers

Borrowers will pay an exponentially higher interest rate on the portion of the curve above 80% utilization. This is to strongly incentivize borrowers to repay their loans and bring the utilization of the pool back down to healthy levels.

USDT Borrow Rates

The reason for such a sharp increase above 80% utilization for this model is due to the much greater risk these tokens carry than the tokens governed by the previous three models.

In the event of a de-peg of MIM or USDT, there could be extreme market volatility and utilization ratios could approach 100%. This circumstance would be extremely unhealthy for the protocol and can lead to a cascading liquidation crisis.

The best way for Lodestar to mitigate this risk is to strongly incentivize both borrowers and suppliers to return liquidity to the pool in high utilization scenarios.