Crypto glossary
Interest rate model (kink)
An interest rate model is the formula a DeFi lending protocol uses to set borrow and supply rates from utilization, usually with a steep kink near full use.
Most DeFi money markets price loans with an interest rate model rather than an order book. The typical design is a two-slope curve: below a target utilization, often called the optimal point or kink, the borrow rate rises gently; above it, the slope becomes much steeper. The supply rate is derived from the borrow rate, multiplied by utilization and reduced by the protocol's reserve factor.
The kink exists to protect liquidity. When a pool gets close to being fully borrowed, a sudden jump in the cost of borrowing pushes borrowers to repay and attracts new deposits, so lenders can withdraw again. Governance or risk managers tune the base rate, both slopes and the kink for each asset, and some newer protocols adapt the curve automatically over time.
A model is only as good as its parameters. Curves set too low can leave a pool stuck at full utilization; curves set too high make borrowing uncompetitive. Rates also change block by block, so the figure shown when opening a position is not a promise.
Example
A stablecoin pool sets its kink at 90% utilization: at 85% borrowers pay about 6% a year, but at 95% the rate jumps to around 30%, quickly drawing in new deposits.