Model Parameters

In Mutuum’s envisioned framework, it is important to differentiate between assets primarily used as collateral (typically volatile tokens) and those that serve other liquidity needs. Collateral-oriented assets require strong liquidity to facilitate prompt liquidations, ensuring that lenders’ capital remains protected. Meanwhile, tokens with lower liquidity demand more conservative interest rate parameters to reduce the risk of sudden utilization spikes or capital shortages.

Market conditions also factor significantly into deciding a token’s borrowing cost and interest rate structure. If yields on external platforms become more attractive, arbitrage seekers may borrow heavily from Mutuum to exploit those opportunities, leaving the protocol at risk of liquidity depletion. By adjusting core parameters - such as the optimal utilization target for each asset and interest rate slopes - Mutuum aims to keep borrowing costs at a level consistent with broader market rates, discouraging excessive arbitrage-induced outflows.

Reducing the optimal utilization rate for specific assets, or raising interest rates more sharply when pool utilization spikes, can help maintain an equilibrium. This mechanism ensures that the cost of borrowing on Mutuum remains competitive with other yield opportunities, mitigating the risk of the protocol running out of capital during periods of strong market demand.

Liquidity mining programs may offer extra incentives for those who supply liquidity, partially offsetting higher borrowing costs for users seeking capital. Mutuum’s token, for example, could be distributed to providers of pivotal assets, compensating them for placing their capital at the protocol’s disposal. This reward system helps preserve liquidity in the protocol, even under volatile market conditions.

Not all assets necessarily qualify for liquidity rewards, however. Strategically directing these incentives toward a select group of tokens can both foster protocol stability and discourage unbridled token inflation. Tokens that are well-capitalized (such as major cryptocurrencies or widely adopted stablecoins) may receive more substantial rewards due to their essential role in lending and collateral use. In contrast, smaller or more volatile assets can introduce disproportionate liquidity risks and may not be prioritized for incentives.

1. Attracting Key Liquidity Encouraging liquidity in stablecoins and major cryptocurrencies helps ensure the protocol remains stable. These assets commonly underpin lending and collateral strategies, so maintaining robust supply deepens the borrowing pool and safeguards solvency.

2. Risk Management Tokens with higher volatility or reduced market depth pose increased risks for lenders and liquidators. By withholding incentives for such assets, Mutuum can minimize undesirable volatility.

3. Limited Resource Allocation Spreading incentives too widely may dilute the token’s value. Focusing on the most crucial assets helps Mutuum optimize yield rewards without weakening the broader token economy.