The majority of the time, Alpha Homora achieves an asset utilization rate between 80 - 90% - consistently one of the highest utilization rates of any lending protocol in DeFi. Why is a high utilization rate specifically crucial for ALPHA stakers?
The below flow outline the importance of high utilization rate for ALPHA stakers:
High utilization rate → high volume of borrowing activity → lots of fees accrued → proportion of fees distributed back to ALPHA stakers
This is in addition to the importance of high utilization rate for lenders on Alpha Homora:
High utilization rate → high volume of borrowing activity → high lending interest rate → attract more lenders to lend on the platform
While the leveraged yield farming borrowing side of Alpha Homora garners a lot of attention, the lending side of the protocol is equally as important. And as a lending protocol, utilization is a vital metric that shows the durability of generating high yields on lender’s capital.
For those who are unfamiliar with utilization rate, it is the percentage of assets being borrowed out (borrowed to leverage yield farm in the case of Alpha Homora) from the total supply of assets lent.
As ALPHA stakers directly accrue value from fees collected in the Alpha ecosystem, stakers naturally benefit from any mechanism that works to increase the amount of fees aggregated across Alpha products.
Demand on Alpha Homora isn’t only created because it is the first leveraged yield farming product in the market, but also through our innovative triple-slope curve interest rate model. What’s the magic behind the scenes of Alpha Homora’s unique borrow interest rate model that creates high utilization rates?
Standard Interest Rate Model in DeFi Lending
Before we dive into Alpha Homora’s triple-slope curve, let's take a look at the incumbent interest rate model most commonly used in the DeFi lending space. Typically, lending protocols design borrowing rate models that heavily emphasize variable interest.
This means that in the standard interest rate model, there is only one optimal point for lenders and borrowers to be at (80% in the image above). The idea behind this concept is simply that higher utilization rates, meaning high demand to borrow assets, will lead to higher borrowing rates or borrowing cost, with the optimal point being the most efficient spot for lending protocols to operate in. Efficient in the sense that even though utilization rates and APR are increasing after the optimal point, lenders face risks of not being able to withdraw their lent assets out. On the flip side, the optimal utilization rate isn’t below 80% as then there are lots of idle assets in the lending pool not generating interest from lenders.
Alpha Homora Combines Fixed And Variable Interest Rate Concept Into One
The core reason Alpha Homora drives utilization more efficiently than the standard model is in the protocol’s innovative borrow model - where fixed and variable interest rates are combined.
Alpha Homora differentiates itself as it creates an optimal range instead of a single optimal point seen in the incumbent model. This means that the borrowing interest rate is fixed at 10% when utilization rate is between 80-90%. This fixed borrowing interest rate then translates to a fixed 9% lending interest rate lenders receive (10% goes to reserves). This means that instead of just a single point, lenders and borrowers have this range that they can be in to be at an optimal position to lend or borrow.
There’s a number of further key points to highlight in this model:
- Our triple-slope model’s optimal range is between 80-90% utilization, with borrowing interest fixed at 10%, because it gives space for lenders to withdraw supplied ETH while simultaneously efficiently utilizing their supplied ETH.
- The model starts at 0% (instead of the standard 2-6% in the incumbent model) because when utilization rate is 0%, and there’s no demand to borrow, borrowing cost should be 0% as well. This way, the cost increases alongside demand.
- The interest rate model’s slope becomes steeper after 90% utilization to discourage a utilization rate that’s too high and prevent a situation where ETH lenders can’t withdraw ETH due to full-utilization.
Our triple-slope curve model is one of the core reasons Alpha Homora has a higher utilization rate than the majority of the lending market. Alpha Homora’s consistently high utilization rate will help accrue more fees, which will then in turn enable ALPHA stakers to collect maximal value on their tokens.
About Alpha Finance Lab
Alpha Finance Lab is a DeFi Lab and on a mission to build an ecosystem of DeFi products (the Alpha ecosystem), consisting of innovative building blocks that capture unaddressed demand in key pillars of the financial system. These building blocks will interoperate, creating the Alpha ecosystem that will be an innovative and more capital efficient way to banking in DeFi.
Alpha Homora is Alpha Finance Lab’s first product and DeFi’s first leveraged yield farming product that captures the market gap in lending, one of the key pillars of the financial system.