AgileRate: Bringing Adaptivity and Robustness to DeFi Lending Markets

Abstract

Decentralized Finance (DeFi) has revolutionized lending by replacing intermediaries with algorithm-driven liquidity pools. However, existing platforms like Aave and Compound rely on static interest rate curves and collateral requirements that struggle to adapt to rapid market changes, leading to inefficiencies in utilization and increased risks of liquidations. In this work, we propose a dynamic model of the lending market based on evolving demand and supply curves, alongside an adaptive interest rate controller that responds in real-time to shifting market conditions. Using a Recursive Least Squares algorithm, our controller tracks the external market and achieves stable utilization, while also controlling default and liquidation risk. We provide theoretical guarantees on the interest rate convergence and utilization stability of our algorithm. We establish bounds on the system's vulnerability to adversarial manipulation compared to static curves, while quantifying the trade-off between adaptivity and adversarial robustness. We propose two complementary approaches to mitigating adversarial manipulation: an algorithmic method that detects extreme demand and supply fluctuations and a market-based strategy that enhances elasticity, potentially via interest rate derivative markets. Our dynamic curve demand/supply model demonstrates a low best-fit error on Aave data, while our interest rate controller significantly outperforms static curve protocols in maintaining optimal utilization and minimizing liquidations.