Why Interest rates?

The Root Finance interest rate mechanism is fine-tuned to balance liquidity risk and maximize utilization. The lending interest rates are influenced by the Utilization Rate U.

The Utilization Rate U serves as a barometer for the pool's capital availability. This interest rate scheme mitigates liquidity risk within the protocol by incentivizing users to maintain liquidity:

• In conditions where capital is plentiful: low interest rates are set to promote lending activities.

• In situations where capital is limited: elevated interest rates are imposed to stimulate debt repayments and incentivize additional capital deposits.