Saga Dollar money markets are the credit engine of the Palomino Finance ecosystem. Lenders who supply tokens in Saga Dollar money markets on Palomino Finance can earn yields and rewards from ecosystem partners and/or the protocol. Borrowers can then supply multiple collateral assets to borrow Saga Dollar (D) tokens and earn interest rebates as well as intrinsic yields/points from their collateral (as applicable).

Palomino Finance enhances user experience by consolidating lending and borrowing into the Saga Dollar asset. Borrowers benefit from exogenous interest rebates, which lower net borrowing costs below market rates—making Palomino Finance an ideal platform for leverage and yield-looping strategies. These subsidies also drive sustained credit demand, pushing utilization to consistently high levels. As a result, Saga Dollar (D) Supply APYs on Palomino Finance may rise above market rates, delivering superior yields to lenders and reducing their opportunity costs.

Most importantly, subsidized borrowers don’t need to employ as much leverage to achieve a similar return profile compared to using unsubsidized stablecoins. This reduces risk while still maintaining attractive yields, making leverage/looping strategies more capital-efficient and resilient on Palomino Finance.

Key Parameters

• The Saga Dollar (D) assets are the only tokens enabled for borrowing on Palomino Finance by default. Therefore, only Saga Dollar (D) markets have lending/borrowing rates.
• Collateral rehypothecation on Palomino Finance is disabled by default to mitigate nested leverage and liquidation risks during volatile markets. However, collateral deposits with intrinsic yields may still appreciate within Palomino Finance.
• The Saga Dollar (D) is disabled as collateral for borrowing to prevent subsidy arbitrage from users who may loop a Saga Dollar (D) asset against itself.
• The Max LTV (loan to value) ratio to borrow varies by collateral but may not exceed 80% in order to limit liquidation risk. This implies a maximum leverage capacity of 5x on Palomino Finance (at 80% LTV).
• Liquidation LTV = Max LTV of collateral + 5 percentage points (as high as 85% LLTV).

Dynamic Interest Rate Model

Palomino Finance utilizes the standard dynamic interest rate model forked from Aave. Like Aave, Supply and Borrow APYs adjust in real time based on the utilization ratio of each market. However, Palomino Finance introduces a key innovation: Saga Dollar (D) borrowing subsidies (interest rebates). These rebates are distributed proportionally to outstanding Saga Dollar (D) debt, effectively lowering the net Borrow APY. As a result, the Saga Dollar (D) rate curve behaves differently—especially at lower utilization levels.

When utilization is low, there is less total debt competing for available subsidies, causing the effective Borrow APY to decline steeply, even becoming negative. In such cases, users may get paid to borrow, net of rebates. This dynamic creates a powerful incentive to borrow whenever the market is underutilized, effectively guaranteeing high utilization over time—since leaving “free money” on the table is unlikely in an efficient market environment.

A hypothetical illustration of borrowing subsidies’ effect on the Borrow APR curve.