Utilization and Rates

Utilization measures how much of a market's liquidity is currently in use. The market's interest rate model (IRM) converts utilization into borrow rates.

What utilization means

Utilization is the percentage of loan tokens currently borrowed from a tranche compared to how much is available.

• When utilization is higher, there is less spare liquidity.

• When utilization is lower, there is more spare liquidity.

Some spare liquidity is useful to facilitate instant borrows and withdrawals.

Why utilization matters

Utilization is the main signal the protocol uses to price rates:

• Higher utilization usually leads to higher borrow rates.

• Lower utilization usually leads to lower borrow rates.

This creates a feedback loop:

• If borrowing demand rises, rates rise.

• Higher rates attract more supply and discourage some borrowing.

• Utilization moves back toward a more balanced level.

Utilization in a tranche-based market

Because liquidity cascades across tranches, a tranche's utilization reflects both its own activity and activity in tranches that draw from the same liquidity. Utilization can therefore differ across tranches even within the same market.

How rates are set

Each market specifies an interest rate model (IRM) that maps utilization to borrow rates. IRMs keep rates stable at low-to-moderate utilization and ramp them aggressively as liquidity becomes scarce, making borrowing more expensive exactly when the market needs to attract new supply.

What you should watch as a user

If you lend

Lender yield tracks utilization — higher utilization means higher borrow rates, which means more interest distributed to lenders.

If you borrow

Borrowing cost rises with utilization and falls as utilization drops. For rate-sensitive positions (e.g., leveraged loops), treat utilization as a primary risk indicator.

Next: Read Liquidations and Bad Debt to understand how a loan is liquidated and how bad debt is allocated.