Utilization, Interest Rates, Risks

Utilization

What Is Utilization?

Utilization refers to the percentage of total available funds in a lending pool that have been borrowed by users. It reflects how much of the pool’s liquidity is currently in use.

Formula:

Utilization=Total Borrowed / Total Lent × 100%

For example:

• If a pool has 1,000 USDT deposited and 800 USDT borrowed,

• Then Utilization = 80%.

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Why Is Utilization Important?

• For Lenders:

  • High utilization means more of their funds are actively lent out, potentially earning higher interest.

  • Very high utilization, however, may limit withdrawal flexibility, as most funds are borrowed.

• For Borrowers:

  • High utilization can lead to higher interest rates, as demand for liquidity is strong.

  • Low utilization generally means lower borrowing costs and easier access to funds.

• For the Exchange:

  • Utilization helps balance supply and demand in the lending market.

  • It influences the dynamic interest rate model — interest rates often increase when utilization is high, encouraging repayment and new deposits.

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Key Parameters

• Optimal Utilization: The point where interest rates begin to increase rapidly to encourage more lending and loan repayments.

• Throttled Utilization: The utilization rate threshold where lend redeems and new borrows are paused to prevent 100% utilization.

• Max Utilization: The maximum utilization rate threshold where no lend redeems or new borrows are allowed, and positions may be automatically deleveraged.

👉Learn more about Utilization

Interest Rates

What Are Interest Rates?

Interest rates represent the cost of borrowing assets or the yield earned by lenders who supply liquidity. Rates are typically variable and adjust dynamically based on market conditions, primarily driven by Utilization (the percentage of funds in the pool that have been borrowed).

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How Are Interest Rates Determined?

1. Utilization-Based Model

   • When Utilization is low, borrowing demand is weak → interest rates are lower.

   • When Utilization is high, borrowing demand is strong → interest rates increase to encourage repayment and attract more deposits.

2. Borrower Interest Rate

   • This is the rate borrowers pay on borrowed assets.

   • The rate adjusts dynamically depending on the pool’s Utilization level.

3. Lender (Deposit) Interest Rate

   • This is the yield lenders earn by supplying assets.

   • It is derived from the borrowing interest rate, after accounting for the exchange/protocol’s fee (if applicable).

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Why Do Interest Rates Change?

• Market Supply & Demand: More borrowing increases rates, while higher deposits reduce rates.

• Liquidity Conditions: High utilization raises rates to incentivize lenders to supply more liquidity.

• Platform Risk Management: Dynamic adjustments help maintain balance and protect against liquidity shortages.

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How can I view the current lending rates?

1. Click “Lend” to enter the Lending page.

2. Open the token selection dropdown menu.

3. You will then be able to view the real-time borrow and lend rates for different tokens.

👉Learn more about Interest Rates

Risks

1. Main Risks for Lenders (Depositors)

• Liquidity Risk: At times of high utilization, it may be difficult to withdraw funds immediately, as most liquidity is already borrowed.

• Market Risk (Asset Depreciation): Lenders deposit crypto assets; if the market value of these assets drops significantly, the real return (in fiat terms) may decrease despite earning interest.

• Variable Interest Rates: Lending yields are not fixed and may fluctuate based on borrowing demand. Lower demand results in lower returns.

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2. Main Risks for Borrowers

• Liquidation Risk: If the collateral value falls below the required maintenance margin, the borrower’s position may be liquidated, potentially at a loss.

• High Interest Costs: During periods of high utilization, borrowing rates may increase sharply, making loans more expensive.

• Collateral Volatility: Since most collateral is in volatile crypto assets, rapid price declines can quickly trigger margin calls and liquidations.

• Over-Leverage Risk: Borrowing against volatile assets may amplify losses if the market moves unfavorably.

👉Learn more about Risks