is a decentralized lending-borrowing platform built on Algorand blockchain. It boasts the largest total value locked (TVL) in the Algorand ecosystem. The protocol enables users to borrow cryptocurrencies from a pool of funds that were deposited by lenders. The borrowers pay a continuously accruing interest to the pool. A part of that interest is paid to the lenders, while some is kept by the platform. All loans are overcollateralized.
The interest rate is changing depending on supply and demand. The ratio of supply and demand is referred to as utilization. As users are constantly adding and removing supply as well as borrowing and repaying funds at Folks Finance platform, the utilization is changing, and thus the borrow rate. The rate is changing to incentivize optimal use of funds. If supply is large, the borrow rate is low to incentivize users to borrow, thus generate more interest for lenders in the future. Vice versa, if the demand is large, the rate is high to incentivize repaying of loans so that lenders can withdraw funds and / or new users open new loans. How the rate is changing is defined for each token depending on its risk which is defined by its liquidity, widespread use, support at centralized exchanges, etc. However, the general interest rate model is the same for all the tokens on the platform.
Above is an example of the interest for Algorand token, created based on the official docs (https://docs.folks.finance/architecture/interest-rate-model). The interest rates linearly increase with utilization. An optimum utilization is defined, above which the interest rate increase more drastically to keep the platform liquid. The parameters for each token can be found in the official docs at https://docs.folks.finance/architecture/parameters
Folks Finance offers a special type of loan - stable. As the name suggests, the borrow rate of a stable loan is fixed at the time the loan is opened. Once the loan is opened, the borrow rate can only change in extreme conditions of little liquidity (for example when utilization is above 90%). This is to discourage ending up with too many loans locked at low fixed rates. For the benefit of stable rate, the stable loans have higher interest rates. The stable rate the protocol is charging is changing not only based on the utilization of the funds but also the ratio of the value of the stable loans compared to the value of the variable loans. How the stable loan interest is changing for borrowing of the Algorand token is shown in the figure below.
The models of both the variable and stable loan rates as well as the whole platform design is based on the Aave protocol - the first decentralized lending and borrowing protocol of its kind, which was initially deployed on the Ethereum blockchain but has since then been deployed to other EVM chains as well as adapted to non-EVM chains like Algorand by the Folks Finance team. Go to the official docs of Folks Finance at https://docs.folks.finance/ to learn more about the technical detail of the protocol.
