Yield Generation Model

The pool takes both the liquidity provided by lenders and the reserve deposited by borrowers to generate yield:

$$Yield_{AMM}​=(L+R)⋅r$$

where $L$ is the pool liquidity, $R$ is the protocol reserve, and $r$ is the AMM's APR.

Lenders earn yield from their non-leveraged capital plus the interest fee paid by the borrower:

$$\text{Yield Lender}=(1−x)⋅\text{Yield}_\text{AMM} + \text{borrow\_fee}$$

Borrowers earn yield from the leveraged portion of the pool and receive their deposit refund, minus the interest fee.

$$\text{Yield Borrower}=x⋅\text{Yield}_\text{AMM} + R − \text{borrow\_fee}$$

What these formulas create is a system in which the lender is exchanging high potential profit from APR volatility for a guaranteed safe return from the loan interest rate, while the borrower is accepting the risk of a highly volatile APR for the potential of a large profit.