Analysing Systemic Risk

The Liquidity Stress Gauge provides a macro-level view of the health of the Decentralised Finance (DeFi) lending market. By aggregating data from major protocols (such as Aave and Compound), we calculate the "Systemic Utilisation Rate". This metric represents the ratio of borrowed assets against total supplied liquidity.

This tool allows you to track crypto lending market stress across the entire ecosystem simultaneously. A low score indicates ample liquidity and cheap borrowing, while a high score suggests capital scarcity.

The "Kink" and Interest Rate Mechanics

Why does this gauge matter? Most lending protocols utilise a non-linear interest rate model, often referred to as the "Kink".

• The Optimal Zone (0% - 80%): Interest rates rise slowly. This encourages borrowing while ensuring lenders earn a modest yield.
• The Kink Point (typically 80%-90%): Once utilisation breaches this threshold, the interest rate curve becomes vertical.

Mathematically, the borrowing rate $R_b$ changes drastically based on utilisation $U$. When $U > U_{optimal}$, the protocol triggers a sharp increase in rates to incentivise repayments and attract new deposits. If our gauge shows values approaching 85% or higher, it signals a potential liquidity crunch where withdrawals may become difficult.

Strategic Implications

Investors and DeFi participants can use this utilisation data to inform their strategies:

• For Lenders (Suppliers): When the stress gauge is high (Yellow/Red), Supply APYs usually spike. This is the most profitable time to provide liquidity, provided you are comfortable with the risk that you might not be able to withdraw instantly if utilisation hits 100%.
• For Borrowers: In a high-stress environment, the cost of borrowing can skyrocket unpredictably. It is advisable to deleverage or repay loans when the gauge enters the "Critical Stress" zone to avoid liquidation or excessive interest costs.

Methodology & Exclusions

To ensure this gauge reflects true peer-to-peer lending market dynamics, we explicitly exclude Collateralised Debt Position (CDP) protocols like MakerDAO and Spark from the calculation.

CDP protocols mint new stablecoins (like DAI) against collateral, whereas standard lending markets (like Aave) rely on re-hypothecating supplied assets. Including CDPs would artificially deflate the utilisation rate, masking the true liquidity stress in the lending markets. This report focuses purely on the re-hypothecation efficiency of the DeFi ecosystem.

Calculation Transparency