Utilization Rate
The share of a lending pool's total deposited assets that are currently borrowed out, used to gauge liquidity pressure and set interest rates.
Utilization rate measures what percentage of a lending pool's total deposited assets are currently lent out to borrowers, calculated as total borrows divided by total deposits. A utilization rate near 100% means nearly all deposited funds are currently borrowed, leaving little available liquidity for depositors who want to withdraw, while a low utilization rate means a large share of deposits sit idle, unborrowed.
Utilization rate is the central input to most DeFi lending protocols' interest rate model (see Kaavon's "Interest Rate Model" glossary definition): rates typically rise as utilization climbs, both to compensate lenders for reduced liquidity availability and to discourage further borrowing as the pool approaches full utilization, helping ensure depositors can still withdraw funds even during periods of heavy borrowing demand.
Examples
- A lending pool with a 90% utilization rate has only 10% of its deposited assets immediately available for withdrawal, with the rest currently lent out to borrowers.
- Interest rates in most DeFi lending protocols rise sharply as utilization rate approaches 100%, specifically to discourage further borrowing and protect depositor liquidity.