// GLOSSARY -- DEFI

What is Utilization Rate?

1 min read Updated

Utilization rate is the percentage of deposited assets currently being borrowed in a DeFi lending pool — the primary driver of interest rates and the key metric for pool health.

WHY IT MATTERS

Utilization = Total Borrowed / Total Deposited. At 0% utilization, no one is borrowing — rates are minimal. At 100%, everything is borrowed — depositors can't withdraw and rates spike.

Optimal utilization is typically 80-90%. The interest rate model is designed to keep utilization near this target. Below optimal: gentle rate increases encourage borrowing. Above optimal: aggressive rate spikes discourage borrowing and attract deposits.

High utilization is a risk signal: it means most capital is borrowed, reducing liquidity for withdrawals. Monitoring utilization is important for both lenders (withdrawal risk) and borrowers (rate stability).

FREQUENTLY ASKED QUESTIONS

What happens at 100% utilization?
Lenders can't withdraw (all funds are borrowed). Borrowing rates spike dramatically to incentivize repayment. This is a temporary but stressful state for the protocol.
What's healthy utilization?
70-85% for most pools. Below 50% means rates are very low (underutilized). Above 90% means withdrawal liquidity is tight. The protocol's rate curve is designed to target the sweet spot.
Does utilization affect my yield?
Directly. Higher utilization → higher lending rates → higher yield for depositors. But extremely high utilization also means higher risk of not being able to withdraw.

FURTHER READING

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