Interest rates in on-chain lending markets are not quoted by anyone. They are produced by a formula that reads a single number: how much of the available pool is currently borrowed.
Utilisation is the only input that matters
Lenders deposit into a shared pool and borrowers draw from it. Utilisation is the borrowed portion divided by the total supplied.
The interest rate is a function of that ratio, recalculated whenever the pool changes. No order book matches individual lenders to individual borrowers.
Because the rate is mechanical, it changes the moment a large deposit or a large borrow lands, without anyone deciding it should.
The curve bends at a target point
Below a chosen utilisation level, rates rise gently as borrowing increases, which keeps credit affordable while there is plenty of idle capital.
Above that point the slope steepens sharply. A pool that is nearly fully lent out produces rates that climb fast with every additional unit borrowed.
The location of the bend is a governance choice rather than a natural constant, and moving it changes how much idle capital the market is willing to carry.
The steep section exists to protect withdrawals
Depositors expect to withdraw on demand, but they can only do so from the unborrowed portion of the pool.
A punishing rate at high utilisation pushes borrowers to repay and attracts new deposits, both of which restore free liquidity.
This is a market incentive rather than a guarantee. If utilisation reaches its ceiling, withdrawals simply wait until repayments or new deposits arrive.
Lenders receive less than borrowers pay
The borrow rate is charged on the borrowed amount, while the supply rate is spread across every deposit, including the idle portion.
A slice is also diverted to a reserve that absorbs bad debt. The visible gap between the two rates is the combination of those two effects.
This is why a pool showing a high borrow rate can still pay depositors modestly. If only a small share of the supplied capital is actually lent out, the interest is spread very thin.
The relationship runs the other way as well: as utilisation climbs, the two rates converge, because the idle portion diluting the lenders' return shrinks towards nothing.
Why quoted yields move so much
A deposit yield advertised today assumes utilisation stays where it is, which it rarely does.
Large withdrawals push utilisation up and rates with it; a wave of new deposits dilutes the same interest across a bigger base and drags the yield down.
Assets used mainly as collateral tend to sit at low utilisation and pay little, while assets people actively want to borrow carry higher and more volatile rates.