Describing the current ways in which FIAT borrow rates operate
Each supported asset type is represented within the FIAT protocol via Collateral Vaults. Collateral vault smart contracts contain the risk parameters that are to be applied to the specific asset types. Among these parameters is the borrow rate, or the cost of minting FIAT against that specific collateral type.
How are borrow rates set?
Borrow rates are currently set by FIAT DAO governance. When a new collateral vault is deployed, it is assigned a static but not immutable borrowing rate value. This value is generally determined via a risk assessment framework discussed by the community. The rate value can be changed at any time either through a) on-chain token holder vote, or b) on-chain guardian multisig intervention.
Why do different collateral types have different borrow rates?
Each collateral type represents a different risk profile to FIAT. As the protocol currently takes on full exposure to deposited collateral, it must be compensated for doing so.
How does borrowing interest accrue?
Borrowing interest accrues on a per block basis that annualizes out to the borrow rate figure reflected on the FIAT DAO user interface. This debt accrues in terms of $FIAT, meaning a user must source more than the original amount of $FIAT minted to pay off their debt.
What happens to paid down interest?
Interest paid down by users accrues to the FIAT DAO treasury. FDT token-holders are the only entities capable of deploying these proceeds.
Core development is underway on an algorithmic interest rate model for FIAT collateral vaults. Details will be shared throughout Q3 2022 but essentially, borrow rates will become a function of capital committed to liquidating bad debt positions from a given collateral vault.