# Overutilization Risks

In lending platforms, the utilization rate is a ratio calculated by dividing the amount being borrowed by the total liquidity available for an asset.

For example, in Aave’s ETH market:

Aave’s Borrowing rates relative to Utilization rate

Aave adjusts its borrow and lending APR based on a utilization formula. As more tokens are borrowed, utilization rate increases, raising interest rates, ceteris paribus. Conversely, if utilization decreases, interest rates decrease. This mechanism is designed to balance the supply and demand within the lending platform, encouraging deposits when borrowing is high and lending when borrowing is low.

**Below Optimal Utilization (U < Optimal)**: The interest rate increases gradually with utilization. This is designed to encourage borrowing when there is enough liquidity available.**At or Above Optimal Utilization (U ≥ Optimal)**: Once the utilization rate passes the optimal point, the interest rate begins to rise sharply. This steep increase acts as a deterrent to borrowers because it becomes significantly more expensive to take out a loan. The optimal rate is typically set below 100% to leave some buffer room.

Overutilization of a lending pool drives up borrowing interest rates which results in a temporary reduction in *tETH* profitability. If the interest rate for borrowing ETH becomes too high, it could outweigh the yield earned from staking the borrowed ETH for LST, thereby eroding profit margins or even leading to potential losses.

Refer to the Utilization Rates and Treehouse Insurance Fund sections for more information.

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