Interest rates are determined by supply and demand. When a lender deposits funds, the interest rates go down. When a trader borrows funds, the interest rates go up. Fulcrum uses a simple linear interest rate formula of the form y = mx + b. The interest rate starts at 1% when loans aren"t being utilized and scales up to 40% when all the funds in the loan pool are being borrowed.
The borrow rate is determined at the time of the loan and represents the net contribution of each borrower. Each borrower's interest contribution is determined by the utilization rate of the pool and is netted against all prior borrows. This means that the total amount of interest flowing into the lending pool is not directly changed by lenders entering or exiting the pool. The entrance or exit of lenders only impacts how the interest payments are split up.
For example, if there are 2 lenders with equal holdings each earning 5% APR, but one of the lenders leave, then the remaining lender will earn 10% APR since the interest payments don't have to be split between two individuals.