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

# 🏦󠀥 Interest

## Overview 🌐

The interest mechanism in Indigo Protocol is designed to enhance the stability of iAssets and provide a consistent revenue stream for the DAO. By applying interest rates to Collateralized Debt Positions (CDPs), the protocol encourages responsible borrowing, thereby maintaining the overall health of the system.

In [Indigo Protocol V3](/readme/indigo-protocol-v3.md), interest is settled in iAssets rather than ADA. See the V3 documentation for the full upgrade details.

## How Interest is Applied ⚙️

Interest rates are dynamic and can be adjusted by the DAO to respond to market conditions. Interest begins to accrue on all active CDPs from the moment they are created. The interest rate is applied to the debt amount, increasing the total amount owed over time.

In V3, each collateral type/iAsset pair has its own algorithmic interest rate oracle. Interest is assessed using the collateral's own interest model.

## Benefits of the Interest Mechanism 📈

1. **Stability Management:** By adjusting interest rates, the protocol can influence the supply and demand of iAssets. Higher interest rates can discourage excessive borrowing, while lower rates can stimulate it, helping to stabilize asset pegs.
2. **Revenue Generation:** Interest paid on CDPs provides a steady stream of iAsset revenue for the DAO. This revenue is distributed through the Interest Collection Script to Stability Pool depositors, Liquidity Providers, and the Treasury.

## Interest Rate Structure 💸

In V3, the interest rate uses an algorithmic mechanism tied to the iAsset Total Collateral Ratio (ITCR) and redeemable liquidity available through the Indigo OrderBook.

**Variable Interest Rate:**

$$
\text{Variable Interest Rate} = \max\left\[0, \frac{(\text{ITCR} - \text{NTCR})}{(\text{CTCR} - \text{NTCR})} \times (\text{Upper Limit Int} - \text{base Int})\right]
$$

**Final Interest Rate:**

$$
\text{Final Interest Rate} = \text{base Int} + (\text{Discount Rate} \times \text{Variable Int})
$$

**Discount Rate:**

$$
\text{Discount Rate} = \left(1 - \min\left\[100%, \frac{\text{RA}}{\text{Buffer rate} \times \text{TMS}}\right]\right)
$$

Where RA is the redeemable iAssets liquidity available via Indigo OrderBook (in-range collateral-to-iAsset buy orders), TMS is Total Minted Supply, and Buffer rate is the percentage of TMS deemed healthy within the redeemable zone.

Higher available OrderBook liquidity leads to greater interest discounts; reduced liquidity results in higher effective interest rates.

## Payment Process ⚙️

### V3: iAsset Interest Settlement

In V3, interest is minted directly as new iAssets and added to the borrower's debt:

1. **Debt display:** Borrowers see a single Total Debt number including principal and accrued (unsettled) interest.
2. **Real-time updating:** Debt increases continuously in the UI. The backend batcher periodically settles interest by minting new iAssets equal to accrued interest and charging them against the loan debt. Interest is settled at adjustment and can also be settled if it has not been settled within the last 5 days.
3. **During CDP closure:** When closing a CDP, the user repays total debt including all accrued interest (already reflected in the iAsset debt balance).
4. **During liquidation:** Interest is minted into the interest collection script, increasing its principal. The Stability Pool then burns principal debt.

### Interest Revenue Distribution

Interest revenue is distributed through the Interest Collection Script (subject to DAO configuration):

* 40% → Stability Pool depositors
* 20% → Liquidity Providers
* 40% → Treasury