> For the complete documentation index, see [llms.txt](https://docs.keikofinance.com/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.keikofinance.com/vaults-interest-model/interest-rate-model.md).

# Interest Rate Model

The Keiko Protocol implements a dynamic interest rate model for its Vaults, which is tailored to the collateral type used within each Vault. This model is designed to adjust interest rates based on the Collateral Ratio of the Vault, thereby affecting the cost of borrowing based on the security provided by the borrower's collateral.\ <br>

### Parameters Defining Interest Rates

* **Base Fee**: This is the minimum interest rate charged on loans within the Vault. It applies under conditions of high collateral security.
* **Max Fee**: This represents the maximum interest rate that can be charged in scenarios where the collateral security is lower.
* **Interest Range**: Defined between the Minimum Collateral Ratio (MCR) and the maxRange parameter, this range sets the bounds within which the interest rate scales.

### Interest Rate Calculation

Interest rates within a Vault are calculated based on the current Collateral Ratio, which compares the total value of the collateral to the total borrowed amount, expressed as a percentage.\
\
Lets see an example with the following collateral parameters:

* **Minimum Fee**: 2.5%
* **Maximum Fee**: 20%
* **MCR Minimum Range**: 110%
* **MCR Max Range**: 150%

**Collateral Ratio Above 150%**: When the Collateral Ratio exceeds **Max Range** (150%), the interest rate charged will be at the **Base Fee** of 2.5% reflecting that the vault has a low risk for the protocol.\
\
**Collateral Ratio Between MCR and Max Range (110% to 150%)**: Within this range, the interest rate increases linearly from the Base Fee at 150% to the Max Fee at 110%. This scaling is designed to incrementally increase the cost of borrowing as the risk associated with the loan the vault is taking increases.

<figure><img src="/files/dNc2rEWwljoHdbxbEDwZ" alt=""><figcaption></figcaption></figure>

This interest rate model allows Keiko Protocol to adjust borrowing costs dynamically in response to changes in the risk associated with active vaults. By doing so, it aims to balance the risk for the protocol while providing fair and competitive rates for borrowers based on their collateral's stability.<br>


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