# Interest Rate Model (IRM)

The Interest Rate Model in Arkis is a configurable pricing mechanism that determines the cost of capital for borrowers and the yield for liquidity providers. It is a central component of Arkis's capital efficiency and risk management framework.

The model serves a dual purpose:

* To incentivize Liquidity Providers to supply capital to Liquidity Pools and Vaults by offering attractive yield.
* To ensure that borrowing remains economically viable for Asset Managers, especially when leveraged positions must generate net positive returns after borrowing costs.

### Model Variants in Arkis

Arkis supports a flexible range of Interest Rate Models. Each Liquidity Pool or Vault can define its own model, based on the nature of capital demand, borrower profile, and market environment. Supported models include:

| Model Type                             | Description                                                                                                                                                                                                       |
| -------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| **Utilization-Based (Dynamic)**        | Interest rate increases as a function of pool utilization. Standard two-slope model with a kink point to reflect capital scarcity.                                                                                |
| **Expected Return-Based (Risk-Aware)** | Interest rate is calculated based on the expected return of the borrower’s strategy and adjusted for portfolio risk or volatility. Used for advanced strategies.                                                  |
| **Fixed Rate**                         | A static rate agreed upon per Agreement. Commonly used in bilateral deals or high-stability strategies like delta-neutral LP farming or by providing fixed on-chain credit line to a reputable DeFi trading firm. |
| **Hybrid Models**                      | Combinations of utilization curve + expected return heuristics, often used by Credit Managers to optimize Vault allocations.                                                                                      |


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