  Decentralized Finance (DeFi) money markets have seen explosive growth in
recent years, with billions of dollars borrowed in various cryptocurrency
assets. Key to the safety of money markets is the implementation of interest
rates that determine the cost of borrowing, and govern counterparty exposure
and return. In traditional markets, interest rates are set by risk managers,
portfolio managers, the Federal Reserve, and a myriad of other sources
depending on the market function. DeFi enables an algorithmic approach that
typically relies on interest rates being directly dependent on market
utilization. The benefit of algorithmic interest rate management is the
system's continual response to market behaviors in real time, and thus an
inherent ability to mitigate risks on behalf of protocols and users. These
interest rate strategies target an optimal utilization based on the protocol's
risk threshold, but historically lack the ability to compensate for excessive
or diminished utilization over time. This research investigates contemporary
DeFi interest rate management strategies and their limitations. Furthermore,
this paper introduces a time-weighted approach to interest rate management that
implements a Proportional-Integral-Derivative (PID) control system to
constantly adapt to market utilization patterns, addressing observed
limitations.
