Utilization Thresholds

Utilization thresholds in decentralized lending protocols represent the specific percentage of available liquidity that has been borrowed by users. When this limit is reached or exceeded, the protocol triggers automated adjustments to interest rates to incentivize liquidity providers to deposit more capital and discourage further borrowing.

These thresholds act as a crucial risk management mechanism to prevent liquidity exhaustion and ensure that depositors can always withdraw their funds. By dynamically scaling interest rates based on utilization, the system maintains market equilibrium and discourages excessive leverage during periods of high demand.

If utilization exceeds the defined threshold, the interest rate model typically shifts to a steeper slope to rapidly increase the cost of borrowing. This ensures that the protocol remains solvent and maintains sufficient liquidity for all participants.