Supply rate is the interest lenders earn for depositing into a DeFi lending protocol. It comes from what borrowers pay, minus a protocol cut. Roughly, supply rate equals borrow rate times utilization times (1 minus protocol fee). If borrow is 10%, utilization 50%, and the fee 10%, suppliers earn about 4.5%.
Rates move with utilization because both the borrow rate and the share of capital actually lent change. High advertised borrow rates with empty utilization can yield less than moderate rates with high utilization. Extra token incentives often sit on top of the base rate and usually fade.
DeFi supply rates beat bank savings in part because you take contract risk, oracle risk, and possible illiquidity when utilization is maxed. Supply rates fluctuate with utilization because they depend on both the borrow rate (which rises with utilization) and the percentage of capital actually borrowed (utilization itself).
A pool with high rates but low utilization might offer lower effective yields than moderate rates with high utilization. Comparing supply rates across protocols and assets helps optimize yield, but rates change constantly and past performance doesn't guarantee future returns.
Additional token incentives (liquidity mining) often boost effective yields beyond base supply rates, though these incentives typically decline over time. Suppliers earn a share of what borrowers pay, minus a reserve. Utilization links the two rates.
Supply Rate
Interest earned by lenders, driven by pool utilization.