Pay-As-You-Earn (PAYE) Model
The prevalent interest rate model (IRM) is what limits users from generating real DeFi yields.
In practice, IRM creates misaligned incentives and imposes such a win-loss relationship between lenders and borrowers.
- Interest Rate Model (IRM) is disconnected from the yields borrowers can earn in the market, the quoted interest rate from the model is not reflected in the actual yield that the leveragoors can earn in the market.
- Lenders enjoy higher yields at the cost of borrowers who pay high interest rates on borrowed funds, pressuring borrowers to generate even higher yields to justify these interest payments.
- Large position sizes of whales and institutions can spike interest rates due to high utilization, capping leveragoors' yields, resulting in negative APY and reduced incentives.
Negative APY due to high utilization
With DeFi is NOT going to have 3-digit or 4-digit yield opportunities anymore, Stella’s 0% cost to borrow and Pay-As-You-Earn (PAYE) model are the ultimate solutions for the current and future DeFi market.
At Stella, the utilization-based IRM is replaced with the Yield Cut - a curve that define how much cut from the yield that the leveragoor made should be going to the lender, aligning the incentives of both leveragoors and lenders and enabling fair and real DeFi yields for all parties involved. Ultimately, setting a new fundamental standard for the next-level DeFi innovation through new ways of leveraging and lending.
Yield Cut Based VS IRM Based Net Yield
Leveragoors will incur no borrowing costs, regardless of the asset's utilization rate. Leveragoors will bear cost only when they generate yields, following Stella’s Yield Cut, and this cost is a % cut from the yields generated.
These yields cut from leveragoors are shared with lenders, enhancing capital efficiency while putting no maximum cap on lending APY. It’s a collective incentive alignment between leveragoors and lenders alike.
How's the Yield Cut is applied to the yield before sharing to the leveragoor and lender