# 💲Hourly Interest Rate

Last updated

Last updated

In DeFi we always talk about APY — Annual Percentage Yield. However, while the APY you see on your bank’s account gives you a good idea about future profits, APYs you find on liquidity mining websites just do not make any sense: they might vary from 130% to 5000% to 20% — it’s impossible to rely on those numbers if you want to forecast your actual returns.

In WOWswap we like simplicity and precise math. Therefore, we took a new approach and introduced **Hourly Interest Rate (HIR)**. Our target users — degens who want to buy promising tokens with 5X leverage — do not care too much about the cost of capital, because they won’t keep their long positions for too long: maybe a few days, or even hours if the market is up. For example, if HIR = 0.1%, a trader who borrows capital just for 1 day will end up paying “only” (1+0.01)²⁴-1 = 2.43%

Paying 2.43% interest for 1 day might seem like a lot, but if the token you bought grows 20% on the same day, with 5X leverage you will make 90% net profit (after repaying the loan with interest). For example: let’s assume you have $100, you borrow $400 and buy a token for $500. After a 20% price surge you will have $600. However, you need to pay back $400*1.0243 = $410 to the liquidity pool, so you left with $600-$410 = $190. Your net return for this trade will be ($190-$100)/$100 = 90%.

Now, let’s see the system from the perspective of liquidity providers: if many traders frequently borrow and return capital to the liquidity pool, 0.1% HIR would be equivalent to 619,485% APY. ** **

Of course, the actual “realized” APY will be lower, because we did not take into account the average utilization rate of the pool and it can’t be always 100%. For example, if the pool’s utilization rate is 50%, it means that only half of the pool’s capital is generating compounding profits, which then will be divided by the total pool’s size to calculate the realized APY.

Hourly Interest Rate for a particular swap depends on the lending pool utilization rate (PUR) and the initial leverage (IL) of the swap. The logic behind is as follows: a higher Pool’s utilization rate should incentivize liquidity providers put more liquidity to the pool, so the HIR should increase when the pool utilization rate grows. Also, the higher initial leverage for the swap, the higher risk this swap brings to the liquidity pool and this risk should be adequately compensated.