Algorithmic interest rate

An algorithmic interest rate takes utilization as its input variable, equal to total borrowed divided by total deposited. The most common model is a dual-slope curve with a breakpoint, or kink. Below the optimal utilization the rate rises gradually along a first slope from a base intercept. Above that point the rate rises much more steeply along a second slope, the jump-rate mechanism, which penalizes over-utilization, encourages new deposits and protects liquidity available for withdrawals. The optimal point is typically set between 80 and 90 percent depending on the asset's risk, and higher for stablecoins, with all parameters public in the contract.

It is the core mechanic of DeFi money markets. It automatically manages the balance between liquidity supply and demand without an intermediary, ensures liquidity always remains for withdrawals by raising the rate when it grows scarce, and keeps the market transparent and predictable. In practice it defines the price of money on-chain. The interest borrowers pay, net of the protocol reserve, generates lenders' return, linking this mechanism to real yield.

Compound makes it explicit in its JumpRateModel contract, which stores the kink, the multiplier for the normal region and the one for the high-utilization region. Aave v3 uses its DefaultReserveInterestRateStrategy with an optimal usage ratio and two slopes. By contrast, MakerDAO and Sky set the rate through governance via their Stability Fee: not all of DeFi uses an algorithmic rate.