# âUtilization Ratio

Definition, Formula and Application

**Utilization Ratio**

The **utilization ratio** is a key metric in lending protocols that reflects the proportion of borrowed funds to the total amount available in a liquidity pool. It is calculated using the following formula:

**utilization_ratio = (total_amount - available_amount) / total_amount**

Here,

total_amount: The total amount of funds in the liquidity pool.

available_amount: The amount of funds remaining in the pool and available for borrowing.

A higher utilization ratio indicates that more funds are being borrowed, whereas a lower ratio suggests that fewer funds are being borrowed from the pool

**Interest Rate Calculation**

The **interest rate** is determined by the utilization ratio, which represents the supply and demand dynamics of the liquidity pool. It is calculated using this formula:

**Interest_rate_per_day = (max_interest_rate - min_interest_rate) * utilization_ratio + min_interest_rate**

Here,

max_interest_rate: The maximum interest rate set by the protocol (e.g., 0.5%).

min_interest_rate: The minimum interest rate set by the protocol (e.g., 0.25%).

**Example**

Consider a liquidity pool with the following characteristics:

total_amount: 1000 SOL

available_amount: 900 SOL

max_interest_rate: 0.5%

min_interest_rate: 0.25%

First, calculate the utilization ratio:

**utilization_ratio = (1000 - 900) / 1000 = 0.1 (10% utilization)**

Next, calculate the interest rate per day:

**Interest_rate_per_day = (0.5% - 0.25%) * 0.1 + 0.25% = 0.025% + 0.25% = 0.275%**

In this example, the interest rate per day is 0.275%.

**Conclusion**

Understanding the utilization ratio and interest rate calculation is crucial for both borrowers and lenders in a lending protocol. By calculating the utilization ratio and interest rate per day, users can better gauge the supply and demand dynamics of the liquidity pool, make informed decisions about borrowing and lending, and optimize their investments in the protocol.

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