Borrowing Rate
In one sentence
Borrowing rate, also called borrow APY, is the variable interest paid by borrowers on lending protocols. A spike can flip a profitable leveraged position into a losing one without any price move.
What it actually means
When you borrow USDC against your ETH on Aave or Morpho, you pay continuous interest on the outstanding debt. The borrowing rate is the annualized cost of that debt, denominated in the borrowed asset. Like lending rate, it is variable and recalculated every block based on market utilization.
How it is calculated
Borrow APY follows a kinked interest rate curve. Below the optimal utilization (often 80%–90%) rates grow gently. Above it, rates grow aggressively to force the market back into balance. Aave V3, Morpho, and Euler all use variants of this model, with parameters tuned per asset and per market.
Why it matters to you
For leveraged strategies — borrow USDC against ETH and buy more ETH, or short an asset by borrowing it — the borrow rate is a direct, ongoing cost. Net APY is supply rate minus borrow rate, weighted by collateral and debt. A spike in borrowing rate can flip net APY negative even while the underlying trade is still working directionally.
- A 2x leveraged stETH/ETH loop is profitable only if stETH yield > ETH borrow rate.
- When ETH borrow rates surge during squeezes, leveraged stakers bleed.
- A short position via borrowing depends on borrow rate staying below the asset's drift.
- Borrow rate spikes often precede liquidations across the market.
Real example
A user borrows 50,000 USDC at 4% to lever up an ETH position. Annual cost: $2,000. During a leverage unwind, USDC utilization spikes and the rate climbs to 18% over 6 hours. New annual cost: $9,000. If the position was earning 7% on collateral, it is now bleeding 11% × debt — and may keep doing so for days until utilization normalizes.
Stable vs variable rate
Aave V2 offered a stable rate mode that fixed the borrow rate for the life of the loan (with conditions). Aave V3 deprecated stable rates because they were rarely used and created edge cases for the protocol. Today, almost all on-chain borrowing on Aave-style protocols is variable. If you want a fixed cost of debt, you have to construct it synthetically using PT/YT instruments or fixed-rate vaults from third parties.
Watching the utilization curve
A useful mental model is to know which side of the kink your market is sitting on. Below the kink, rates are stable and predictable: a few percent of utilization change moves the rate by basis points. Above the kink, the curve steepens dramatically and small utilization changes produce double-digit rate moves. Once a market spends time above the kink, it is signaling either real demand to borrow or stress in the system. Either way, it is the moment to pay attention.
How Otomato monitors it
Otomato tracks borrow APY on every asset you have outstanding across Aave, Morpho, and Euler. You get alerted when the rate increases beyond your threshold or when your net APY (yield minus cost) crosses zero. The alert tells you which position is bleeding and how much before the bleed compounds.
Related terms
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