Interest rates

Overview

In Based, annual interest rates determine which vaults will be consumed in the redemption process. For each redemption, the lowest APY vaults will be redeemed first. If your vault has the lowest rate, you will lose some or all of your debt, and a proportionate amount of collateral.

How do interest rates work?

Interest rates are locked for fixed periods, or epochs.
Each epoch is ~1 week in Bitcoin blocks (1008 blocks).
Interest rates are set by borrowers on a per vault basis as an estimated APR.
- Minimum APY: 1%
- Maximum APY: 100%
Interested payments are calculated and paid in BSD (debt added to the vault).
You can adjust the interest rate of a vault any time, but the new rate will apply to next epoch. You cannot adjust the current epoch rate. The only exception is for new vaults.
Interest owed for a vault, or accrued, is calculated on a per block basis. While individual vault actions trigger interest accrual, the Keeper also periodically calls a function vault::process-epoch-accrual to ensure interest is accrued for vaults across the system, often aligned with epoch boundaries (~1 week / 1008 blocks).

You should monitor your interest rate, accrued interest, and collateral ratio closely. Interest payments will slowly reduce your CR overtime. You can periodically pay back debt, or add more collateral, to counter this effect.

Choosing an interest rate

Vault creators choose their own interest rates. The higher your interest rate, the lower your risk of redemption. You can adjust the rate any time. Your rate should be informed by your risk tolerance and market conditions.

The risk of redemption for any particular vault is informed by three variables:

The future dollar price of BTC
The amount of redemptions occurring or expected to occur
The distribution of interest rate choices amongst other vault holders

Cumulative interest rates choices in Based create a forward looking redemption risk market. A simple way to encapsulate the risk is a particular vault’s Redemption Buffer; the amount of global debt that would need to be redeemed before a specific vault would be redeemed against (Liquity has a similar mechanism and the call this debt "debt in front"). For example, if a vault had a 2% APY, and 50% of all debt in Based has a lower rate, the Redemption Buffer would be 50%.

In time periods of low volatility and low amount of redemptions, you can expect the interest rate market to gain efficiency—that is you can achieve a greater buffer with less absolute spend on interest rate. The spread in interest rates should also tighten.

In time periods of high volatility and high redemptions, you can expect the interest rate market to lose efficiency and increase competitiveness—now it will cost more to achieve the same level of redemption buffer. The spread in interest rates should expand.

Delegate your interest rate

The protocol provides the option for you, the vault owner, to delegate the management of your vault's interest rate to another trusted Stacks principal (address), such as a friend, a automated service, or a separate hot wallet. This can spare you from constantly having to monitor and update your interest rate.

You can delegate your interest rate after a vault is created.
You specify the Stacks principal that has permission to update the vaults APY.
Once the delegation is set the assigned delegate principal can call a separate function to set the next epoch's interest rate for your vault.
While delegated you can still update your interest rate.
You can revoke delegation any time.

Only delegate rate management to principals you fully trust. While generally safe there are a couple failure modes you should be aware of. A malicious delegate could:

Set your rate too high causing your CR to rapidly degrade leading to early liquidation
Set your rate too low, causing you your vault to be redeemed

Interest rate example

The global debt is 1M BSD
Alice's vault has 100,000 BSD debt she chooses 1% APY. She has the lowest interest rate of all vaults so her redemption buffer is 0%
Bob’s vault has 100,000 BSD debt and he chooses 2% APY. He has the second lowest rate of all vaults so his redemption buffer 10% (100,000 / 1,000,000)
Sarah’s vault has 100,000 BSD debt and she chooses 3% APY. She has the third lowest rate of all vaults so her redemption buffer is 20% ( (100,000 + 100,000) / 1,000,000)
Charlie decides to redeem 100,000 BSD. All of Alice’s debt is consumed.
Bob’s vault is now the lowest APY vault with active debt. Bob’s redemption buffer is now 0%. Bob does not like this.
Bob adjusts his interest rate to 4%. Bob’s vault will now be redeemed after Sarah’s and his redemption buffer has moved from 0% to 10% (100,000 / 1,000,000)

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Last updated 28 days ago

How do interest rates work?

Interest rates are locked for fixed periods, or epochs.

Each epoch is ~1 week in Bitcoin blocks (1008 blocks).

Interest rates are set by borrowers on a per vault basis as an estimated APR.

Minimum APY: 1%
Maximum APY: 100%

Interested payments are calculated and paid in BSD (debt added to the vault).

You can adjust the interest rate of a vault any time, but the new rate will apply to next epoch. You cannot adjust the current epoch rate. The only exception is for new vaults.

Interest owed for a vault, or accrued, is calculated on a per block basis. While individual vault actions trigger interest accrual, the Keeper also periodically calls a function vault::process-epoch-accrual to ensure interest is accrued for vaults across the system, often aligned with epoch boundaries (~1 week / 1008 blocks).

Choosing an interest rate

The risk of redemption for any particular vault is informed by three variables:

The future dollar price of BTC

The amount of redemptions occurring or expected to occur

The distribution of interest rate choices amongst other vault holders

Delegate your interest rate

You can delegate your interest rate after a vault is created.

You specify the Stacks principal that has permission to update the vaults APY.

Once the delegation is set the assigned delegate principal can call a separate function to set the next epoch's interest rate for your vault.

While delegated you can still update your interest rate.

You can revoke delegation any time.

Only delegate rate management to principals you fully trust. While generally safe there are a couple failure modes you should be aware of. A malicious delegate could:

Set your rate too high causing your CR to rapidly degrade leading to early liquidation

Set your rate too low, causing you your vault to be redeemed

Interest rate example

The global debt is 1M BSD

Alice's vault has 100,000 BSD debt she chooses 1% APY. She has the lowest interest rate of all vaults so her redemption buffer is 0%

Bob’s vault has 100,000 BSD debt and he chooses 2% APY. He has the second lowest rate of all vaults so his redemption buffer 10% (100,000 / 1,000,000)

Sarah’s vault has 100,000 BSD debt and she chooses 3% APY. She has the third lowest rate of all vaults so her redemption buffer is 20% ( (100,000 + 100,000) / 1,000,000)

Charlie decides to redeem 100,000 BSD. All of Alice’s debt is consumed.

Bob’s vault is now the lowest APY vault with active debt. Bob’s redemption buffer is now 0%. Bob does not like this.

Bob adjusts his interest rate to 4%. Bob’s vault will now be redeemed after Sarah’s and his redemption buffer has moved from 0% to 10% (100,000 / 1,000,000)