Utilization rate

All interest rates are calculated based on a metric called the utilization rate.

$$U_a = Borrows_a / (Cash_a +Borrows_a)$$

Where:

• $Borrows_a​$: the total amount of assets borrowed from the protocol.

• $Cash_a$: the total amount of assets available in the protocol (not borrowed)

Higher utilization ratios indicate significant borrowing activity, causing interest rates to rise in order to incentivize more cash injections into the system. Conversely, a low ratio reflects weak borrowing demand, prompting interest rates to decrease to encourage more borrowing. This aligns with the economic theory that the "price" of money, represented by its interest rate, is influenced by the dynamics of supply and demand.