Utilization and rates

Utilization measures how much of a market’s liquidity is currently in use. The protocol uses utilization to determine interest rates through the market’s interest rate model (IRM).

This page explains how to interpret utilization and what it means for rates. It does not cover formulas.

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 one of the main signals the protocol uses to price rates. In practice:

• 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 Lotus uses tranches, utilization is not only “per tranche.” Liquidity can be shared across tranches, so a tranche’s utilization reflects both:

• activity in that tranche, and

• activity in tranches that can draw from the same liquidity.

What you should take away:

• Utilization is still the core “demand” signal.

• In Lotus, tranche structure affects who can use which liquidity, so utilization can look different across tranches even when they share a market.

How rates are set

Lotus does not hardcode a single rate curve. Each market specifies an interest rate model (IRM) that determines the borrow rate as utilization changes.

In general, IRMs are designed to:

• keep rates relatively stable when utilization is low to moderate, and

• increase rates more aggressively when utilization becomes high and liquidity is scarce.

This helps protect the market during stress by making liquidity more expensive when it is most needed.

What you should watch as a user

If you lend

Utilization affects your expected return because it affects the borrow rate paid by borrowers.

• When utilization rises, lender yield often rises.

• When utilization falls, lender yield often falls.

Your actual outcome depends on market design and how much borrowing demand exists.

If you borrow

Utilization affects your cost of borrowing.

• When utilization rises, borrowing usually gets more expensive.

• When utilization falls, borrowing usually gets cheaper.

If your position is sensitive to rate changes (for example, a leveraged loop), treat utilization as a primary risk indicator.

Next steps

• Read Interest rate models (IRMs) to learn how the IRM shapes rates across utilization levels.