# 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**.

<div data-full-width="false"><figure><img src="https://3812384006-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FwKYaramAO33J40rM5uhN%2Fuploads%2F1OYcfutH7LNQEZkGSlRx%2FScreenshot%202566-05-29%20at%2013.44.27.png?alt=media&#x26;token=f170d379-cbdc-4f28-b74e-22174f3d5bec" alt=""><figcaption><p>Negative APY due to high utilization</p></figcaption></figure></div>

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.

Stella has replaced the utilization-based IRM with the **PAYE Graph - a curve that determines the proportion of leveragoors' generated yield allocated to lenders**. This aligns the incentives of both leveragoors and lenders, facilitating fair and genuine DeFi yields for all participants. This advancement sets a new fundamental standard for the next-level DeFi innovation by introducing innovative methods of leveraging and lending.

<figure><img src="https://3812384006-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FwKYaramAO33J40rM5uhN%2Fuploads%2FDErYZGFdUkpY95bKxqj1%2FScreen%20Shot%202566-06-07%20at%2020.40.58.png?alt=media&#x26;token=4a296dad-5177-4ed5-8dbd-8f9108ad7415" alt="" width="563"><figcaption><p>Yield Share Based VS IRM Based Net Yield</p></figcaption></figure>

## PAYE Model In-Action

**Leveragoors will not experience any borrowing costs, irrespective of the asset's utilization rate. They will bear cost only when they generate yields**, in accordance with Stella's PAYE Graph, wherein a yield share portion is taken from the generated yields.

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.&#x20;

<figure><img src="https://3812384006-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FwKYaramAO33J40rM5uhN%2Fuploads%2FaC9T4Bm5eMSbX3io72TN%2FScreen%20Shot%202566-06-07%20at%2020.47.59.png?alt=media&#x26;token=e96a8c02-a0d0-4b73-ba1c-a8fdf8982970" alt=""><figcaption><p>How the Yield Share is applied before sharing to the leveragoor and lender</p></figcaption></figure>

{% content-ref url="../protocol-mechanism/yield-calculation/paye-graph" %}
[paye-graph](https://docs.stellaxyz.io/stella-doc/~/changes/4fF4ewjtMXRPWHi41cyF/protocol-mechanism/yield-calculation/paye-graph)
{% endcontent-ref %}