Utilization rate measures the percentage of deposited assets currently borrowed in a lending protocol, serving as the key input for dynamic interest rate adjustments. If $80 million is borrowed from $100 million deposited, utilization is 80%. This metric balances competing needs: lenders want high utilization for better yields, but too-high utilization creates withdrawal risk where depositors can't access their funds because they're all lent out. Interest rate curves solve this by sharply increasing rates at high utilization. A typical curve might keep rates low below 80% utilization, then sharply increase them above that threshold. At 99% utilization, rates might reach 100%+ APY, incentivizing borrowers to repay and lenders to deposit. The 'kink' point where rates accelerate varies by asset: stablecoin pools often target higher optimal utilization (85-90%) because stablecoins have predictable values, while volatile assets target lower utilization (70-80%) because rapid price movements can cause mass withdrawals. Monitoring utilization helps predict rate changes and withdrawal availability. During market stress, utilization can spike across protocols as traders scramble to borrow for leveraged positions or liquidity needs, temporarily restricting withdrawals and spiking rates.
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