Debt and Interest Accounting

Interest accounting on Credit v1 is pessimistic and noncompounding.

Pessimistic: when marking down bad debt, only the principal is considered, not the interest. We can't know how much interest the protocol actually earned until after a loan is closed, so a pessimistic accounting system makes it easier to fairly distribute interest (to stakers, lenders, and the surplus buffer) and account for any losses.

Noncompounding: principal and interest are tracked separately in each loan. This makes it easy to track how much interest you will have to pay as a borrower. If the loan's interest rate is 5% and you borrow $1000, after one year you will have to repay $1050 to reclaim your collateral.

The basic interest rate model on Credit v1 is stable, meaning that unless a lending term is offboarded, a user can borrow at the same rate indefinitely. In the near future, an adjustable rate model will be added, where optimistic governance similar to the lending term onboarding process can adjust the interest rate up or down for existing loans.