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  1. RISK
  2. Risk Framework
  3. Lending Market Liquidity Risk

Utilization

Each token liquidity is characterized by its utilization rate UUU :

U=TotalBorrow/TotalSupplyU \hspace{1mm} = \hspace{1mm} Total Borrow \hspace{2mm} / \hspace{2mm}Total SupplyU=TotalBorrow/TotalSupply

UUUmonitors which share of the total supplied capital is borrowed at time ttt.

As UUUgets closer to 100%, the capital becomes scarcer until no more supplied asset is available. This situation can be problematic if suppliers wish to withdraw their liquidity, but no funds are available. Please note that though it is the scarcest case, it is possible utilization rate is greater than 100% as platform reserve will be open for borrowing, but will not be included in Total Supply calculation.

Still, high utilization results in high returns for suppliers. It's therefore essential to maximize utilization while protecting liquidity.

All of the token markets are calibrated around an optimal utilization rate UoptimalU_{optimal}Uoptimal​ (which we call "Kink") that reflects market conditions. It is presented in Pawnfi's interest rate model.

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Last updated 2 years ago

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