The rate model and market parameters
The curve that turns utilization into a rate — and the point where the protocol chooses between yield and availability.
This lesson has had no expert review. It was written for this platform and against the evidence it cites; nobody has gone through it independently.
Learning objectives
- You can explain what the kink in a rate curve is for.
- You can name which market parameters governance sets, and what they do.
Check your prior knowledge
Answer these for yourself before reading on. Wherever you hesitate is where this lesson pays off.
- How are utilization and rate connected?
- What happens to withdrawals at very high utilization?
- Who sets the share the protocol retains?
Core concept
The kink is a target, not a technical detail
Below a set utilization the rate rises gently, above it steeply. That kink marks the utilization the protocol targets: below it borrowing should stay cheap, above it the steep rise should push borrowers back and attract new deposits, so free capital is preserved. The curve is thus the instrument a protocol steers withdrawability with — without a liquidity buffer and without a central bank.
Four parameters, all set by governance
The kink's position, the slope above and below it, the maximum loan-to-value per collateral, and the share of interest the protocol retains. None follows from a formula; all four are decisions and can be changed — including for existing positions. Forecasting a lending market's return implicitly forecasts that those four numbers stay put.
The retained share shifts the return, not the rate
Of the rate borrowers pay, the protocol retains a share; the rest goes to depositors. Raising that share lowers the depositor return with nothing changing in utilization or borrowing rate — and from the APY figure alone it is indistinguishable from falling demand. Which is exactly why the parameter belongs in monitoring, not only in the initial review.
Definitions
- Kink
- The utilization from which the rate curve becomes markedly steeper.
- Reserve factor
- The share of borrowing interest the protocol retains.
- Market parameter
- A governance-set quantity determining a lending market's behavior.
Model
Utilization — demand relative to supply
Rate curve — gentle below the kink, steep above
Borrowing rate — what borrowers pay
Reserve factor — deduction in the protocol's favor
Depositor return — what arrives
Formulas
Depositor return from the borrowing rate
Depositor return ≈ borrowing rate × utilization × (1 − reserve factor)- utilization
- share of supplied capital that is lent out
- reserve factor
- share the protocol retains
Limit: The relation explains why the depositor return sits far below the borrowing rate at low utilization. It assumes all three quantities are stable over the period — with variable rates and changeable parameters that holds only momentarily.
Worked example
Two paths to the same fallen return
- Starting point
- borrowing rate 6.0 %, utilization 70 %, reserve factor 10 %
- Depositor return
- 6.0 × 0.70 × 0.90 ≈ 3.78 %
- Case A
- utilization falls to 55 %
- Case B
- reserve factor rises to 29 %
A: 6.0 × 0.55 × 0.90 ≈ 2.97 %. B: 6.0 × 0.70 × 0.71 ≈ 2.98 %. Nearly identical.
The same return figure from two entirely different causes.
Reading: Case A is market activity and reverses with demand. Case B is a decision and stays until a new one is taken. Watching the APY alone cannot tell them apart — that needs utilization and the reserve factor as data points of their own.
Interactive model
The worked example, with movable figures. Estimate first what happens — then check.
Kinked interest-rate model
Utilization, parameters and the reserve factor together decide what reaches the depositor.
Estimate first, then check
Before you move the sliders: the example's depositor return falls from 3.78 % to about 2.97 % when utilization drops to 55 %. What change in the reserve factor does the same — and how does the chart tell the two apart?
The starting values are the worked example's own figures — change one input at a time.
Borrow rate: 6.0%. Depositor rate: 3.8%.
What the model does not show: The rate model here is a two-segment line with one kink. Real markets use other curves and change parameters through governance; the model shows the shape, not any particular market's parameters.
Retrieval
Exercise on real data
Open a lending market and note utilization and the depositor APY. Work back to what borrowing rate and retained share would fit — and record which of those quantities is not reported here.
Read utilization and APY side by side →Application
Which four quantities do you monitor on a lending market where your organization holds capital?
Related case studies
Institutional reading
- Bank
- Is the market's targeted utilization compatible with the institution's own liquidity requirement?
- Asset management
- Would a change in the reserve factor be noticed before it shows up in the return?
Metrics in this lesson
Key takeaways
- The rate curve is the instrument a protocol steers withdrawability with.
- Four market parameters are decisions, and apply to existing positions too.
- A falling return can be demand or the retained share — the APY figure does not tell them apart.
Evidence
- EVD-2026-0008
DeFiLlama — DeFiLlama yields endpoint (/pools)