Algorithmic Interest Rates

Definition ∞ Algorithmic interest rates are variable charges for borrowing or rewards for lending digital assets, determined by automated protocols. These rates dynamically adjust based on real-time supply and demand parameters within decentralized finance platforms. Smart contracts automatically execute these rate modifications without central authority intervention. The system aims to maintain liquidity and capital efficiency by incentivizing or disincentivizing participation.
Context ∞ Discussions often center on the volatility of these rates, their impact on investor returns, and the stability of various DeFi protocols. Regulators are examining how these automated financial mechanisms operate and their potential systemic risks. Future developments include more sophisticated models that account for external market conditions and oracle reliability.