Utilisation & Interest Rates

What Is Utilisation?

Chainflip Lending uses a utilisation curve model to determine real-time borrowing and lending rates. Utilisation represents how much of a pool’s liquidity is currently borrowed:

As utilisation rises, available liquidity decreases, which increases borrowing rates and boosts yield for suppliers.

A utilisation curve keeps the lending market balanced by automatically:

• increasing borrowing costs when liquidity becomes scarce
• rewarding suppliers when demand rises
• encouraging repayment at high utilisation
• attracting additional lenders to supply more liquidity

This dynamic ensures the pool remains healthy without manual intervention.

How the Utilisation Curve Works

The Chainflip utilisation curve has two segments:

Low to Optimal Utilisation

Interest rates rise gradually as utilisation increases. Borrowing remains inexpensive, and lender yields stay moderate. This encourages loan creation and normal market activity.

Above Optimal Utilisation

Once utilisation passes the optimal point, the curve becomes steep. Borrowing costs rise sharply to prevent liquidity exhaustion and to attract more supply.

Higher yields naturally attract additional liquidity into the pool, increasing the amount available for borrowing. This provides a secondary mechanism, beyond borrower repayments, that helps bring utilisation and rates back down to normal levels.

This behaviour gives borrowers confidence that rates can normalise through increased supply, not solely through their own repayments.

Interest Accrual

Interest is always accrued in the borrowed asset.

Examples:

• Borrowing USDC → interest accrues in USDC
• Borrowing USDT → interest accrues in USDT

Lenders always receive yield in the same asset they supplied, regardless of what other users borrow. Interest is calculated every 10 blocks and distributed proportionally to all suppliers, however it needs to exceed a certain threshold (0.1 USD) before it is collected and distributed in the pool.

Network Fee Rate

A flat additional 1% APR network fee is added on top of the supply rate to derive the final borrow rate.

Example at 90% utilisation:

• Supply rate = 8% APR
• Borrow rate = 9% APR (The extra 1% goes to the protocol)

Network fees are periodically swapped into FLIP via the buy-and-burn mechanism.

Collateral Does Not Auto-Supply

In this version of Chainflip Lending, a borrower’s collateral is not automatically deployed into the lending pools.

While some lending protocols allow collateral to generate yield by supplying it into the pool, Chainflip keeps collateral strictly separate. This:

• improves safety
• simplifies accounting
• prevents unintended exposure
• keeps collateral purely focused on loan health and liquidation protection

Collateral is only used for:

• determining LTV
• maintaining loan health
• liquidation if required

Why Utilisation Matters for Borrowers and Lenders

For Borrowers

• Low utilisation → cheaper borrowing
• High utilisation → more expensive borrowing
• Very high utilisation → strong incentive to repay or add collateral
• Additional supply entering the pool helps bring rates down

For Suppliers

• Low utilisation → lower yields
• High utilisation → higher yields
• Very high utilisation → strong returns but indicates heavy borrowing demand
• New lenders are incentivised to join when yields spike