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How borrower interest accrues, where protocol revenue goes, and how the pool socializes bad debt. Driven by supply_index_ray and borrow_index_ray. Read first: Markets. The pool never iterates accounts. It stores supply and debt as scaled amounts and applies interest to everyone at once by advancing two indexes, supply_index_ray and borrow_index_ray. A position’s actual balance is always derived from its scaled amount and the current index.

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Scaled balances

Every supply and debt amount is stored as a scaled RAY value. The actual amount is the scaled value multiplied by the relevant index: 
amount = scaled_amount_ray · index_ray / RAY
Supply positions and totals use supply_index_ray; debt positions and totals use borrow_index_ray. RAY is 10^27. Both indexes start at RAY (1.0) when a market is created and only ever rise from interest — except the supply index, which a bad-debt cleanup can lower (see below). Views reconstruct actual supplied and borrowed amounts on demand from the current index and the asset’s decimals.

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Utilization

Utilization is the fraction of supplied liquidity that is currently borrowed, in RAY: 
U = borrowed_actual / supplied_actual          [RAY]
When supplied is zero, utilization is defined as zero (utilization, common/src/rates.rs:142). Utilization drives the borrow rate and, through it, the supply rate.

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Borrow-rate model

The annual borrow rate is a piecewise-linear curve with two kinks — mid_utilization and optimal_utilization — producing three regions. It starts at base_borrow_rate and adds slope1, then slope2, then slope3 as utilization climbs (calculate_borrow_rate, common/src/rates.rs:9): 
U < mid:            base + slope1 · U / mid
mid ≤ U < optimal:  base + slope1 + slope2 · (U − mid) / (optimal − mid)
U ≥ optimal:        base + slope1 + slope2 + slope3 · (U − optimal) / (1 − optimal)
rate = min(rate, max_borrow_rate)
The final rate is capped at max_borrow_rate (≤ 2·RAY). Parameters must satisfy base ≤ slope1 ≤ slope2 ≤ slope3 ≤ max and 0 < mid < optimal < 1 RAY, so the curve is non-decreasing.
max_utilization is a separate hard cap, not a rate kink. When a borrow or withdraw would push post-state utilization above max_utilization, the call reverts with #127 UtilizationAboveMax (unless max_utilization ≥ 1 RAY). It bounds how much of the pool can be borrowed; it does not change the rate curve. On every current mainnet market max_utilization = 95%, while optimal is 80% (or 65% for BTC and ETH).

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Accrual

On every mutating pool call and on update_indexes, the pool advances the borrow index by compounding the rate over the elapsed time. Compounding is per millisecond, accrued in chunks of at most one year, using an 8-term Taylor approximation of e^x (compound_interest, common/src/rates.rs:59): 
new_borrow_index = old_borrow_index · e^(rate_per_ms · Δt_ms)
The borrow index is capped at 1e36 (MAX_BORROW_INDEX_RAY, common/src/constants/pool.rs:11); exceeding it raises #33 MathOverflow. The Taylor remainder is bounded because each per-chunk exponent is small.

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Splitting interest

The interest accrued on outstanding debt is split by reserve_factor_bps into a protocol fee and supplier rewards (calculate_supplier_rewards, common/src/rates.rs:123): 
accrued_interest = borrowed · (new_borrow_index − old_borrow_index)
protocol_fee     = reserve_factor_bps / BPS · accrued_interest
supplier_rewards = accrued_interest − protocol_fee
The supplier share lifts supply_index, so every supplier’s position appreciates without any per-account write. The supply index is floored at WAD (SUPPLY_INDEX_FLOOR_RAW = WAD, common/src/constants/pool.rs:4); if it is already at or below that floor, the reward step is skipped. The protocol fee is added to revenue_ray and held as a scaled supply claim. The display supply APR follows directly (calculate_deposit_rate, common/src/rates.rs:37): 
supply_apr = utilization · borrow_rate · (1 − reserve_factor_bps / BPS)
Worked example: at U = 80% (0.8e27), a borrow rate of 5% (0.05e27), and a reserve factor of 1000 BPS (10%), the supply APR is 0.8 · 0.05 · 0.9 = 0.036 — a 3.6% supply rate against a 5% borrow rate.

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Protocol revenue

Protocol revenue is not a separate token balance. It is held as a scaled supply claim in revenue_ray, bounded by total supply (0 ≤ revenue_ray ≤ supplied_ray), so it appreciates with the supply index until claimed. On claim_revenue the pool syncs indexes, reconstructs the claimable amount, caps it by live reserves, burns the proportional scaled revenue, and transfers to its owner — the controller — which forwards it to the configured accumulator. See Controller ABI.

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Rewards

add_rewards(asset, amount) lifts supply_index so every supplier benefits proportionally, exactly as the supplier-interest share does. It raises #37 NoSuppliersToReward if the market has no supply, because there is no scaled base to distribute against.

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Bad debt

When an account’s total collateral is ≤ $5 WAD (BAD_DEBT_USD_THRESHOLD = 5·WAD) and its debt exceeds that collateral, the position is unrecoverable. Cleanup — inline during a liquidation, or via the keeper’s clean_bad_debt — seizes all of the account’s supply and debt, removes the account, and socializes the shortfall by lowering each affected market’s supply index proportionally: 
new_supply_index = supply_index · (1 − capped_bad_debt / total_supplied_value)
The result is floored at WAD (SUPPLY_INDEX_FLOOR_RAW), so the index can never reach zero and divide-by-near-zero is impossible. The shortfall is shared across that market’s suppliers; the event CleanBadDebtEvent records the cleared totals. See Liquidations.

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Fixed-point units

UnitRawDecimalsUsed for
BPS10_0004Reserve factor, LTV, liquidation threshold / bonus / fee, tolerances.
WAD10^1818USD prices, USD position values, health factor, dust floors.
RAY10^2727Indexes, utilization, rates, scaled supply and debt balances.
Multiply and divide helpers use half-up rounding by default, flooring where it protects the protocol and ceiling for amounts a user owes.

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Next

Markets

What a market is and how its rate model is configured.

Risk parameters

Reserve factor, caps, dust floors, and the rate-model constraints.

Liquidations

How bad debt is triggered and socialized into the supply index.